Pass-through certificate

A pass-through certificate¹ is an instrument that evidences ownership in an underlying pool of assets, serving to signify the transfer of interest in favor of the holder. An equipment trust certificate is a specific case. In creating such a pass-through structure, the underlying assets are "bundled" into a pass-through security² (also known as a "pay-through security"), where the principal and interest payments are "passed through" to certificate holders.³ Here, a servicing intermediary collects the monthly payments from issuers and passes them through to the security holders for a fee.

Pass-throughs are the basic structure on which securitizations are built; see mortgage-backed security, asset-backed security and collateralized debt obligation. The advantage of these structures is that they serve as a means of diversifying the asset pool and increasing the demand for and size of the offering. At the same time, the investor in a pass-through transaction acquires these rights subject to¹³ all their material risks, including prepayments, fluctuations in the asset portfolio, and the risk of interest rate variations.