A mortgage-backed security (MBS) is a type of asset-backed security that consists of a bundle of mortgage loans purchased from an issuing bank. MBS investors usually receive periodic payments similar to bond coupon payments.
There are two common types of MBSs, pass-throughs and collateralized mortgage obligations (CMO). Pass-throughs is a trust, in which mortgage loans are collected and passed on to investors. CMO is composed of multiple securities, which are called slices, or tranches. The credit ratings assigned to these tranches determine the interest rate returned to investors.