Passthrough Securities

Passthrough Securities

See Also:
Collateralized Debt Obligations
Secured Claim
Subordinated Debt
Mezzanine Debt Financing (Mezzanine Loans)
Asset Based Financing

Passthrough Securities Definition

A passthrough security is a debt obligation that represents the cash flows towards a certain asset or liability. There is often an intermediary between the cash flows and the investor who provides a lump sum many times to receive several cash payments in the future.

Passthrough Securities Explained

Passthrough securities are similar to asset-based financing; however, asset based financing involves using an asset like land for a loan. Whereas a passthrough security simply passes future cash flows onto an investor. Some of the most well known pass through securities were involved in the recent financial crisis. These are regularly known as mortgage backed securities (MBS) and asset backed securities (ABS). Furthermore, these securities simply take the future mortgage or asset payments toward a certain asset and sell them in the market for a lump sum. As a result, a company can see more cash or liquidity up front. Notice that the passthrough occurs between the person making the payment to the bank or financial institution, and the financial institution then providing this cash to the investor. In most situations, a bank will assume the role as a passthrough entity.

Passthrough Securities Example

For example, Money Bank specializes in the real estate market and provides financing to individuals buying houses. In order to stay liquid and keep providing loans Money Bank groups the mortgages it has obtained every quarter and sells them in the marketplace at a discount. Bob is a wealthy investor and wishes to invest in something that will provide him a meaningful return. Bob comes across the passthrough securities provided by Money Bank and decides to purchase some of the pass through securities. Both parties have benefited because Bob is earning a meaningful return while the Bank has received liquidity and can now provide more real estate loans.
Passthrough Securities

Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content