What is a mortgage-backed security (MBS)?

A mortgage-backed security (MBS) is indeed defined as a financial instrument backed by a pool of mortgages. This means that MBS pools together various individual mortgage loans, which are then sold as a single investment product to investors. These securities provide returns to investors through the interest and principal payments made by the homeowners whose mortgages are included in the pool. The collection of these mortgage payments is what generates income for the MBS, making it a popular investment vehicle in the financial markets. This structure allows for the spreading of risk associated with individual mortgage defaults over a larger pool, which can enhance liquidity and diversifies investment opportunities for investors.

The other options describe different financial products that do not fit the characteristics of an MBS. A personal loan is an unsecured loan typically offered by banks without any collateral, while a government bond is a fixed-income security issued by a government. An insurance policy related to real estate would focus on protecting against property-specific risks rather than serving as an investment backed by mortgages.