What defines a mortgage bond?

A mortgage bond is defined as a type of bond that is secured by various assets of the issuing firm, often including real estate or physical property. This means that in the event of default, the bondholders have a claim on the specified assets that have been pledged as collateral. This security gives mortgage bonds a lower risk profile compared to unsecured bonds, leading to a more favorable interest rate for investors.

The use of collateral is critical as it provides assurance to the bondholders that they will have recourse to recover their investment. Mortgage bonds typically benefit from the solidity of the underlying assets, making them an attractive option for more risk-averse investors.

In contrast, other types of bonds, such as unsecured bonds, do not have this backing and consequently might offer higher potential returns in exchange for increased risk. Therefore, understanding that a mortgage bond relies on asset backing is key, differentiating it from unsecured bonds and clarifying why this definition is accurate.