Which type of securities are mortgage-backed securities (MBS)?

Mortgage-backed securities (MBS) are financial instruments that are specifically backed by a pool of mortgages. This means that the cash flows from the mortgage payments made by borrowers are used to pay the MBS investors. The underlying asset for these securities is residential or commercial mortgages, which directly link their value to the performance of the property loans.

Choosing the option that MBS are secured by mortgages correctly identifies the fundamental characteristic of these securities. The security provided comes from the actual real estate loans that serve as collateral, making it essential for understanding how MBS operate in the financial market. The other choices involve different types of assets that do not pertain to the structure of MBS, as they do not derive their value from mortgage loans.