Loan-Backed Securities (LBS)
Loan-backed securities (LBS) are financial instruments created by pooling together loans, such as mortgages, auto loans, or student loans, and selling them to investors as securities. The cash flows from the underlying loans, including principal and interest payments, are passed through to the security holders. LBS allow financial institutions to transfer the risk of the loans to investors and provide liquidity to the loan market. Mortgage-backed securities (MBS) are a common type of LBS.
Example
A bank pools a group of home loans into mortgage-backed securities (MBS) and sells them to investors, who receive the monthly mortgage payments as income.
Key points
• Securities created by pooling together loans and selling them to investors.
• Investors receive the cash flows from the underlying loans, such as principal and interest payments.
• Mortgage-backed securities (MBS) are a common form of loan-backed securities.
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