Mortgage bond
Also known as: first mortgage bond
A mortgage bond is a corporate bond secured by a lien on real property owned by the issuer, such as land, buildings, or factories. If the issuer defaults, bondholders can claim the pledged real estate to recover their investment.
A mortgage bond is a type of secured corporate debt. The issuing company pledges specific real property — land, office buildings, plants, or other real estate — as collateral for the bond. Because bondholders hold a legal claim (a lien) on tangible assets, mortgage bonds are considered safer than unsecured debt of the same issuer and typically pay a lower interest rate as a result.
Mortgage bonds are often issued in a hierarchy. First mortgage bonds carry a senior claim on the pledged property, meaning those bondholders are paid first from the sale of the collateral in a default. Second (or general and refunding) mortgage bonds hold a junior lien on the same property and are paid only after the first mortgage bondholders are satisfied. Utilities and other capital-intensive companies with large real estate holdings are the most common issuers.
It is important not to confuse a mortgage bond with a mortgage-backed security (MBS). A mortgage bond is corporate debt backed by the issuer's own real estate. An MBS is a pooled security backed by home loans, typically issued by agencies or government-sponsored enterprises. Contrast mortgage bonds also with debentures, which are backed only by the issuer's general creditworthiness.
The Series 7, Series 6, and Series 66 exams all cover mortgage bonds within corporate debt. Expect questions distinguishing secured bonds (mortgage bonds, collateral trust certificates, equipment trust certificates) from unsecured debentures, and ranking claim priority in a liquidation.
Key takeaways
- A mortgage bond is corporate debt secured by a lien on the issuer's real property.
- First mortgage bonds have a senior claim on the collateral; junior mortgage bonds are paid afterward.
- Secured status makes mortgage bonds safer than debentures from the same issuer, so they generally yield less.
- A mortgage bond is not the same as a mortgage-backed security, which is backed by pools of home loans.
- The Series 7, Series 6, and Series 66 exams test mortgage bonds as a form of secured corporate debt.