A pass-through security (PT security), also a pay-through security, is a security issued out of a pool of fixed-income securities (a pass-through pool) backed by a package of underlying assets of similar features. It represents a pool of collateral (underlying assets) which is created and held by a trustee holding legal title to the assets, directly or through an agent, for the benefit of the pool and the holders of the respective pass-through certificates/ pass-through securities.

Pass-through pools are the basis for creating mortgage-backed securities (e.g., mortgage-backed bonds) by putting together similar mortgage loans (in terms of credit quality, maturity, etc.) into a single security. Investors in a pass-through pool receive a portion of every interest and principal payment (less any service charges), commensurate (on a pro rata basis) to an investor’s ownership share in the pool.

A pass-through security constitutes a debt obligation (and in a specific aspect, a derivative instrument) embodying the cash flows associated with a certain asset or liability. It simply passes future cash flows onto an investor, the holder of a respective share in the pool. The main types of this security are mortgage backed securities (MBS) and asset backed securities (ABS).

These securities simply pool and package specific assets (collateral), collect the future mortgage or asset payments toward a specific asset and sell the “rights” in the packaged assets in the market for a lump sum amount. The pass-through agent (a pass-through entity) intermediates between the payer (of a series of debt obligations) to a bank or financial institution, and the financial institution as it pays these amounts to the investors/ holders of pass-through securities. In most cases, the financial institution, itself, takes on the role of a passthrough entity.