Asset-backed securities provide several advantages to investors and the originating company alike. An asset-backed security is a type of bond backed by financial assets like leases, credit card debt, trade receivables, home equity loans and auto loans, but not mortgages. In the United States, securities backed by mortgages are considered a different class of security, which you can learn more about at the Securities and Exchange Commission Web site. To create an asset-backed security, a company sells its loans, receivables, etc. to a securities dealer, which then issues a bond representing those underlying assets.

Asset-backed securities present several advantages to the company that originated the loans or other assets. The company is able to issue more loans with the cash received from the sale of assets. The risk associated with the security's underlying assets is transferred from the issuing company to the asset-backed security's purchasers. Also, because the asset-backed security's credit rating is based on the underlying securities and not the creditworthiness of the company that issued them, the asset-backed security can have a higher credit rating than the company. This leads to lower interest payments.