pass-through security

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Pass-Through Security

A derivative security representing the receivables on some debt. That is, a shareholder of a pass-through security is entitled to a portion of the income from the debt. Generally, a pass-through security has a large number of debts underlying it; for example, a pass-through may represent a portion of several hundred car loans. The most common type of pass-through is a mortgage-backed security.

pass-through security

A security that passes through payments from debtors to investors. Packages of loans are assembled and sold to investors by private lenders. Although pass-through securities have stated maturities, the actual lives of the securities are likely to be shorter, especially during periods of falling interest rates when borrowers pay off mortgages early. The security derives its name from the fact that interest and principal payments made by borrowers are passed through monthly after deduction of a service fee. Also called pass through. See also Ginnie Mae pass through, production rate, weighted-average coupon rate, weighted-average maturity.

Pass-through security.

When a corporation or government agency buys loans from lenders to pool and package as securities for resale to investors, the products may be pass-through securities.

That means regular payments of interest and return of principal that borrowers make on the original loans are funneled, or passed through, to the investors.

Unlike standard bonds, whose principal is repaid at maturity, the principal of a pass-through security is repaid over the life of the debt.

The best known pass-throughs are the mortgage-backed bonds offered by Fannie Mae, Freddie Mac, and Ginnie Mae. However, you can also buy pass-through securities backed by car loans, credit card debt, and other types of borrowing. Those are known as asset-backed securities.

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