Mortgage bonds are made up of a pool of home mortgages. The agencies that issue these bonds include GNMA (Government National Mortgage Association--a U.S. government agency), Freddie Mac, and Fannie Mae (Freddie and Fannie are government-sponsored enterprises). Private institutions such as banks also issue mortgage-backed securities.
A big risk with these bonds is that mortgage holders will prepay their mortgages, and the bondholders will not get the interest they thought they would. Because these bonds carry prepayment risk, their interest payments are a little higher.
Municipal Bonds >>