Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

The total value of a mortgage bond issue should be less than the value of the backing real estate. This principle is rooted in risk management and investor protection. Mortgage bonds are secured by specific real estate assets, and in the event of default, bondholders have a claim on these assets.

Having the bond value lower than the value of the underlying real estate provides a margin of safety for investors. It ensures that even if the real estate market fluctuates or if the property experiences a decline in value, there remains adequate collateral to support the bondholders' claims. This cushion helps to protect investors in cases of foreclosure or bankruptcy, contributing to a more stable investment environment.

If the bond value were to exceed the value of the real estate, it exposes bondholders to greater risk. In such a scenario, if the issuer defaults, the assets backing the bonds may not be sufficient to cover the outstanding debt, potentially leading to losses for the bondholders. Therefore, it's essential for the bond value to remain less than the value of the real estate backing it, ensuring that the investment is adequately secured.