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Can someone explain to me what a "mortgage bond" is? From my understanding, a bond is like a loan that you give to companies or the govt and they pay you interest on it. I dont understand what a mortgage bond is, and whenever i look it up it just explains it as "a bond backed by mortages" which doesn't make sense to me.
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Someone goes and gets a mortgage. And then a thousand other people go and get a mortgage.
The bank, to get rid of risk and gain some extra cash, then sells these mortgages to an investment bank.
The investment bank pools all the mortgages into investments for people to buy (the bonds).
Now when the home buyer goes to pay some of the mortgage off (monthly payments) part of those profits are kicked back to those who bought the bond.
If anything goes wrong or mortgagees cant pay back the loan, the bond still has value since it's tied to the mortgage (the asset or home) which is where a mortgage backed bond comes into play.
Because these bonds are attatched to an actual asset, returns arean't always thst high.
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