Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Bond

What it is:

A mortgage bond uses a mortgaged property as collateral.

How it works (Example):

A mortgage bond is collateralized by one or several mortgaged properties. In case of default, the mortgaged properties may be sold to pay back bondholders.

For example, suppose bond ABC is backed by a mortgage on property XYZ. If bond ABC goes into default, the holders of the bond may liquidate property XYZ as compensation.

Why it Matters:

Mortgage bonds, unlike traditional bonds with similar characteristics, tend to have lower yields. The reason is that mortgage bonds are lower risk because the mortgaged property is pledged as collateral.