Finance glossary
Mortgage-Backed Security
Definition
A bond backed by a pool of home loans, paying investors from the borrowers' payments.
A mortgage-backed security bundles hundreds or thousands of individual mortgages into a single tradable bond. Investors receive a share of the principal and interest homeowners pay each month. Mortgage-backed securities let banks free up capital to issue more loans, but their risk depends heavily on how likely the underlying borrowers are to default or refinance.
In a sentence
The fund bought a mortgage-backed security to earn steady income from a diversified pool of home loans.
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