Question

What are the advantages to investing in mortgage bonds? What are the disadvantages? Would you personally invest in mortgage bonds? What kind would you pick and why?

Answer 1

Mortgage bonds are those bonds which are backed by securities and these are the debt instruments which are collateralized by pool of mortgages.

Advantages of mortgage bonds are as follows-

A. There is a high amount of security because of these bonds are backed by assets.

B. Mortgage backbones are highly liquid bonds so they can easily be sold out.

C. This is a slightly cheaper kind of bonds then bank loans and credit lines so they are efficient in nature.

D.these bonds are generally fairly priced because the securitization of mortgage encourages lenders not to under charge or over charge for mortgage.

Disadvantages related to mortgage bonds are-

A. Yields of mortgage bonds are lower than the corporate bonds.

B. These bonds are also bearing a high amount of reinvestment risk.

C . There is a tendency of negative convexity and uncertain cash flows on mortgage bonds.

I would personally like to invest in mortgage bonds because they are secured in nature and they will be offering me with a high amount of liquidity also and I would be selecting those mortgages backed bonds who are offering me with low amount of risk and high amount of asset realisation along with adequate pricing.