How to Define Mortgage Bonds
A mortgage bond is a collateral-backed bond, in which the entity issuing the bond pledges property to protect the bondholder from default.
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Bond
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A bond is a security issued by a borrower that obligates the issuer to make specified payments to the bondholder over a specified period of time. In other words, a bond is a promissory note issued by a business or government agency to a person who desires to loan them money.
Collateral
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Collateral is a specific asset pledged against possible default on a bond. Mortgage bonds are backed by claims on property.
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Default
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Default occurs when the issuer of the bond fails to make scheduled interest and/or principal payments to a bondholder. If default occurs, the market interest rate on the security is affected, and the bondholder can potentially sell off the pledged property to recover the lost money.
Indenture
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A bond is issued with an indenture, which is the contract between the issuer and the bondholder. Included in the indenture is a set of restrictions that protects the rights of the bondholder. The restrictions usually include provisions relating to collateral, dividend payments and further borrowing.
Regulations
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All securities trading is regulated by two pieces of legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934. The Securities Act requires full disclosure of all relevant information to potential investors, and the Securities Exchange Act established the Securities and Exchange Commission to administer the provisions of the 1933 act.
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