What defines a commercial mortgage-backed security (CMBS)?

A commercial mortgage-backed security (CMBS) is defined as a fixed-income investment that is specifically backed by mortgages on commercial properties. This type of security pools various commercial real estate loans, such as those on office buildings, retail spaces, and industrial facilities, and then issues bonds that are sold to investors. The cash flows from the underlying mortgages are passed through to the bondholders, providing them with income that is derived from the payments made on these commercial property loans.

This distinct nature of a CMBS distinguishes it from other types of securities. For instance, residential mortgage-backed securities (RMBS) are similar but are focused on residential properties, which is why the option referring to investment backed by residential mortgages is not correct. Additionally, an equity investment in commercial real estate implies ownership of the property itself rather than a debt security like a CMBS. Lastly, while a CMBS involves debt secured by real estate, it is not defined merely as a type of debt secured by tangible assets, as that definition can include a broader range of debt instruments beyond those linked specifically to commercial mortgages.