We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Pass-Through Security?

By Lynelle Harmon
Updated May 17, 2024
Our promise to you
WiseGEEK is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGEEK, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A pass-through security is a collection of debt-backed financial securities for which investors purchase shares. Payments pass monthly from the debtors through the issuer, who deducts a fee and divides the remaining payment to the security holders. Inflation puts the securities at risk as they are fixed income, paid at intervals, and vulnerable to early debt contract termination. Mortgage-backed securities issued by government agencies are the most common types of pass-through securities.

The pass-through security investment is created when a private organization or government agency bundles together a collection of debt assets, such as car loans or home mortgages, which are currently being paid off by debtors. Shares of this asset pack are sold to multiple investors. Multiple shares spread the risk in case of default on the part of the debtors.

A debtor then makes monthly principal and interest payments on the loan to the debt’s issuer. This issuing organization accepts the payment and deducts a servicing fee to keep. The remaining payment is divided amongst the shareholders according to share amounts, and payments are made on interval across the life of the contract.

The securities are fixed-income, meaning that the regularly paid amount is a set amount. Inflation can cause that to erode, as it can lower the interest rates that the debtors are paying on the loans. Vastly lowered inflation rates can also inspire debtors to pay off the debt early.

Investors benefit from a longer pass-through security contract since the payments are made on intervals throughout its life. The stated maturity date can be shortened in the case of early payoff. Shareholders lose whatever future payments might have been owed. Credit insurance is often available to protect investors from defaults, but it doesn’t cover the loss of return due to early termination.

The most popular type of pass-through security is mortgage-backed certificates due to a generally lessened risk. A pool of mortgages is formed and backed by a United States governmental agency such as Fannie Mae and Ginnie Mae. Mortgage-backed securities are also available from private organizations, but they carry the standard risk level of a general pass-through security.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.