You did a decent job of giving an example of an asset-backed bond. But that security is NOT a derivative, as the term is currently used--as in "credit default swaps".

See if you can come up with a story that describes a real derivative. They amount to two or three times the amount if the "toxic loans" and asset-backed securities (mortgage-backed bonds) that are presenting the world with financial indigestion.

Because derivatives really are a huge part of the problem--the biggest part, really--maybe the readership here would appreciate your simplified example of what they are and how they work.