A pass-through certificate James Chen (2022)
"Pass-Through Certificate: What it Means, How it Works"

Investopedia Investopedia is a global financial media website headquartered in New York City. Founded in 1999, Investopedia provides investment dictionaries, advice, reviews, ratings, and comparisons of financial products, such as securities accounts. It ...

is an instrument that evidences

ownership Ownership is the state or fact of legal possession and control over property, which may be any asset, tangible or intangible. Ownership can involve multiple rights, collectively referred to as '' title'', which may be separated and held by dif ...

in an underlying pool of assets, serving to signify the transfer of interest in favor of the holder. An

equipment trust certificate An equipment trust certificate (ETC) is a financial security used in aircraft finance, most commonly to take advantage of tax benefits in North America.Peter S. Morrell, ''Airline Finance'' (Ashgate, 1997), p. 153. Details In a typical ETC transa ...

is a specific case. In creating such a pass-through structure, the underlying assets are "bundled" into a pass-through securityYann Le Fur, ''et. al.'' (2022)
"Pass through"
vernimmen.com (also known as a "pay-through security"), where the principal and

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

payments are "passed through" to certificate holders. Troy Segal (2020)
"Understanding Pass-Through Securities and Their Risks"

Here, a servicing intermediary collects the monthly payments from issuers and passes them through to the security holders; this for a fee. Pass-throughs are the basic structure on which

securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...

s are built; see

mortgage-backed security A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...

asset-backed security An asset-backed security (ABS) is a Security (finance), security whose income payments, and hence value, are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of sma ...

and

collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...

. The advantage of these structures is that they serve as a means of diversifying the asset pool and/or increasing the demand for, and size of the offering. At the same time, the investor in a pass-through transaction acquires these rights subject to all their material risks, including prepayments, fluctuations in the asset portfolio, and the risk of interest rate variations.

References

Securities (finance) {{Econ-stub