Collateralized Mortgage Obligation (CMO)
A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus. Investopedia Says:
Here is an example how a very simple CMO works: The investors in the CMO are divided up into three classes. They are called either class A, B or C investors. Each class differs in the order they receive principal payments, but receives interest payments as long as it is not completely paid off. Class A investors are paid out first with prepayments and repayments until they are paid off. Then class B investors are paid off, followed by class C investors. In a situation like this, class A investors bear most of the prepayment risk, while class C investors bear the least.
CMOs usually offer low returns because they are very low risk and are sometimes backed by government securities. Related Terms:
Collateralized Debt Obligation - CDO
Commercial Mortgage Backed Securities - CMBS
Companion Bond
Mortgage-Backed Securities - MBS
Pass-Through Security
Planned Amortization Class (PAC) Tranche
Sequential Pay CMO
Targeted Amortization Class - TAC
Tranches
Z-Tranche |