Collateralized Mortgage Obligation (CMO):
The purpose of this post is to provide the reader with a description of the investment phrase “Collateralized Mortgage Obligation.” Please keep in mind that this post is being provided for educational purposes only. Consequently, it is not designed to be complete in all material respects. Thus, it is should not be relied upon as legal or investment advice. If the reader has any questions relative to this post, please contact a qualified professional.
A Collateralized Mortgage Obligation (CMO) is a mortgage-backed bond that separates mortgage pools into different tranches based on maturity and risk. This is accomplished by applying income (payments and prepayments of principal and interest) from mortgages in the pool in the order that the CMOs pay out. Tranches pay different rates of interest and can mature in a few months, or as long as 20 years.
The word “tranche” is used to set forth the risk, maturity, or other classes into which a multi-class security, such as a CMO is split. The characteristics of the tranche purchased as well as over-all market and interest rate trends has a substantial impact on the risk associated with the purchase. Thus, it is critical for the investor that he or she fully understand these issues before considering a CMO purchase.
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