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 Assets and these are the kind of debt instruments which will be collateralized by pool of mortgages.

Advantages of mortgage bonds are as follows-

A. These are are economical in nature because they are priced lower in relation to bank loans and credit lines.

B.these mortgage bonds will be offering a high level of security because they are backed by collateral.

C.there is a high level of liquidity involved with these bonds because they can easily be sold out when needed.

D. mortgage bonds are generally fairly priced because the securitization of mortgage bonds will be encouraging lenders not to overprice these mortgage bonds.

Disadvantages related to mortgage bonds are as follows-

A. These mortgage bonds are generally offering a lower rate of return because they are highly secured kind of securities.

B. There is an extreme tendency of negative convexity and there is uncertain cash flows also associated with the mortgage bonds.

C. These mortgage bonds are also bearing a higher amount of prepayment risk and reinvestment risk.

I would personally not like to invest into these kind of bonds because these bonds are offering a lower rate of return even though they are secured in nature and I would be trying to look for those bonds which are offering me a high rate of return and providing me with the security also, either if I have to look for only security then I will be going for treasury bonds.