Mortgage bond

Definition

A mortgage bond is a type of bond secured by a mortgage or pool of mortgages on real estate assets. Investors in these bonds have a claim on the underlying property in case of default.

5 Must Know Facts For Your Next Test

1. Mortgage bonds are generally considered safer than unsecured bonds due to their collateral backing.
2. They can be issued by both corporations and government entities.
3. In the event of issuer default, mortgage bondholders have priority over unsecured creditors in asset claims.
4. The interest rates on mortgage bonds are typically lower than those on unsecured bonds due to reduced risk.
5. Mortgage-backed securities (MBS) are a specific type of mortgage bond where the asset pool consists of residential mortgages.

Review Questions

• What distinguishes a mortgage bond from an unsecured bond?
• Why might an investor prefer a mortgage bond over other types of bonds?
• How does the collateral backing affect the interest rates on mortgage bonds?

Related terms

Collateral: Assets pledged by a borrower to secure a loan or bond, which can be seized by the lender if the borrower defaults.

Unsecured Bond: A type of bond that is not backed by any specific assets and relies solely on the creditworthiness of the issuer.

Mortgage-Backed Security (MBS): A financial instrument made up of a bundle of home loans bought from the banks that issued them, providing investors with periodic payments derived from principal and interest payments made by homeowners.