Mortgage Bond

Written By:
Paul Tracy
Updated October 16, 2020

What is a Mortgage Bond?

A mortgage bond uses a mortgaged property as collateral.

How Does a Mortgage Bond Work?

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 Does a Mortgage Bond Matter?

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.