👉 An asset weapon is a financial instrument that derives its value from an underlying asset, such as real estate, commodities, or other securities. When an investor holds an asset-backed security (ABS), they are essentially lending money to a financial institution that pools these assets together. The cash flows from the underlying assets, typically generated through loans or receivables, are used to pay returns to investors. This mechanism allows investors to gain exposure to the asset class without directly owning it, while the financial institution benefits from the potential for higher yields and diversification. However, asset weapons can also introduce risks, particularly if the underlying assets decline in value or if prepayment rates increase unexpectedly.
