What is a Mortgage Bond?

A mortgage bond is a debt offering that is secured by the issuing entity's real estate or equipment. If the issuer defaults on the bond, the property collateral is paid over to the bond holders. This extra level of security for the bond investor usually leads to a lower effective interest rate on the bond.

A variation on the concept is when a bond is backed by a pool of real estate mortgages. Investors in the bonds have rights to the cash flows from the pool.

Disadvantages of Mortgage Bonds

The only real disadvantage of a mortgage bond is that the extra repayment security provided by the collateralization of real estate also means that its yield tends to be lower than what can be found for unsecuritized bond offerings. So, if you are searching for a higher yield on an investment, a mortgage bond may not be a good investment choice.