Question

How frequently do mortgage pass-through bonds make payments?

Answer 1

Mortgage pass-through bonds usually make monthly payments to investors based on the principal and interest payments collected from the underlying mortgage loans. Bond issuers are obligated to make these payments, and failure to do so may result in legal action, although there's no guarantee of full recovery if the issuer's assets are insufficient.

Step-by-step explanation:

Mortgage pass-through bonds typically make payments on a monthly basis. These securities represent an ownership interest in a pool of mortgages. The payments made to investors are derived from the principal and interest payments collected from the underlying mortgages in the pool. A bond issuer has promised to make certain payments over time and, except for rare bankruptcy cases, these payments are expected to occur. When a firm issues bonds, it promises to pay bondholders a specified rate of interest during the bond’s life and to repay the principal when the bond matures. The interest payments received by the bondholders come from the company's cash flow, and in the case of mortgage pass-through, from the payments made by the borrowers on their mortgage loans.

While a bondholder typically expects regular interest payments, and ultimately the return of principal, there are risks involved. If a firm fails to make the promised interest payments, the bondholders may enforce payment through legal action, which can potentially involve the firm selling off its assets to make payments. However, there is no guarantee that the firm will have sufficient assets to cover the debt, potentially leaving bondholders with less than they are owed.

Answer 2

Mortgage pass-through bonds usually make payments monthly. They consist of both principal and interest collected from the underlying home loans. If a company defaults on its bond obligations, bondholders can take legal action, though they may not always recover the full amount invested.

Step-by-step explanation:

Mortgage pass-through bonds typically make monthly payments to investors. These payments are derived from the principal and interest payments made by the homeowners on the underlying mortgages that are grouped together in the pass-through pool.

When a company issues bonds, it is effectively taking a loan from the bondholders and commits to paying interest, typically semi-annually or annually, depending on the terms, and the principal upon maturity. If a company fails to make these promised payments, the bondholders have the right to take legal action to enforce payment, which could include the company having to sell its assets to raise funds. However, if the company's assets are insufficient, bondholders could recover less than the invested amount.

A well-diversified portfolio of bonds, including junk bonds, can be a way to mitigate risk, as not all companies are likely to default simultaneously. Investment in mortgage pass-through securities also involves similar considerations of risk and diversification.