January 29, 2022

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Meaning of Mortgage Bond (Debenture) and Key Explanations

Meaning of Mortgage Bond (Debenture) and Key Explanations
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Bonds can come in different forms. One of such is mortgage bond or mortgage debenture. When a corporate bond is secured with the properties of the company, it is referred to as mortgage Debenture or Bond. In this article let us examine this.

Definition of Mortgage Bond (Debenture)

1. It is a type of Bond in which the holders have a right to the properties of the investee in the case of default of repayment of interest and/or principal.
2. It can also be defined as a bond secured on a single mortgage or mortgages, so that, if the borrower defaults the investors or holders can sell the mortgage to settle the debt.

Key Explanations

From the first definition. The case is when a company issues a secured Bond. Which is secured on the property, plants or equipment of the entity. On default of payment by the company, the bondholders can seize the properties of the company to reclaim their investment.

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The second definition is the case of a mortgage bank or finance house. They help individuals buy houses by issuing a mortgage debenture to the public. The bond is secured on the homes of the individuals. So, if there is a default in payment by the homeowners, the home of the defaulter(s) can be seized. Then, sold to reclaim the principal and interest sum.

Bonds secured on mortgages or real estate are less risky than a corporate Debenture. This is secured on the trust that the entity is capable of paying regularly the interest due. And can repay the principal amount. But Mortgage Bond is on the real estate of the investee.

Less interest rate. With less risk comes with less returns. Why? Because it is secured on the Properties of the debenture issuer. As a result, the interest rate received by the holder is also small. This is true when compared to a more unsecured Debenture. But the rate will be higher than a Government or Treasury Bond.

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Conclusion

A mortgage Bond is secured on the company’s properties, plants or equipment. It can also be secured on real estate of home seekers. That is, if it is issued by a mortgage finance house. Such debt is less risky and therefore gives the holder a smaller interest amount when compared with an unsecured loan. However, it is better than a Government Debenture.

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