Definition: A mortgage backed security, or MBS, is a debt instrument (a bond) that is backed by a pool of home mortgages. From the same pool of mortgages, several CMO tranches are normally created. The least risky tranches have a priority claim on interest and principal paid by holders of the underlying mortgages. In return, these tranches receive the lowest rates of interest. The riskiest tranches are the first to absorb any defaults by the mortgage holders. In return, these tranches receive the highest rates of interest.
Also Known As: CMO, REMIC
