What type of investment is a Commercial Mortgage-Backed Security (CMBS)?

A Commercial Mortgage-Backed Security (CMBS) is indeed a bond that is secured by commercial mortgages. These securities are created from a pool of commercial real estate loans, which are then packaged together and sold to investors. The income generated from the underlying commercial mortgages—typically in the form of monthly mortgage payments—serves as the source of cash flows for the CMBS investors.

When investors purchase a CMBS, they essentially acquire a share of these pooled mortgages, receiving regular interest payments and the return of principal as the underlying loans are paid down. This investment structure is appealing to many investors because it allows access to the real estate market without the need to directly own and manage properties. Additionally, CMBS can offer diversification by spreading risk across various commercial properties and geographic locations, making them a vital option within the broader fixed-income investment landscape.

In contrast to other options, stock in a tech company represents equity ownership and is subject to different risks and returns. A mutual fund for residential properties focuses on investments in residential markets, which is different from the commercial focus of a CMBS. Government-backed securities typically involve debt instruments issued or backed by governmental entities, which operate under different terms and risk profiles compared to commercial mortgage-backed instruments.