CMO

CMO

See: Collateralized mortgage obligation

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CMO

See collateralized mortgage obligation.

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Collateralized Mortgage Obligation

An asset-backed security backed by mortgages. Banks package and sell their receivables on mortgages to investors in order to reduce the risk coming from defaults. Returns on CMOs are paid in tranches; that is, an individual mortgages backing CMOs have different maturities and investors are paid out according to their level of investment. Banks offer higher interest rates to investors willing to buy CMOs backed by higher-risk mortgages, such as subprime mortgages. See also: Collateralized loan obligation.

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Collateralized mortgage obligation (CMO). CMOs are fixed-income investments backed by mortgages or pools of mortgages.

A conventional mortgage-backed security has a single interest rate and maturity date. In contrast, the pool of mortgages in a CMO is divided into four tranches, each with a different interest rate and term.

Owners of the first three tranches receive regular interest payments and principal is repaid to reflect the order in which the tranches mature. The fourth tranche is usually a deep-discount zero coupon bond on which interest accrues until maturity, when the full face value is repaid.

CMOs usually involve high-quality mortgages or those guaranteed by the government. Their yield may be lower than those of other mortgage-backed investments.

However, the way in which they are repaid makes them especially attractive to institutional investors including insurance companies and pension funds.

The risk, as with all mortgage-backed securities, is that a change in interest rates can affect the rate of repayment and the market value of the CMO.

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CMO

See collateralized mortgage obligation.

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Collateralized Mortgage Obligation (CMO)

What Does Collateralized Mortgage Obligation (CMO) Mean? 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 passthrough securities are used to retire the bonds in the precise order specified by the bonds' prospectus.

Investopedia explains Collateralized Mortgage Obligation (CMO) CMOs work as follows: CMO investors are divided into three classes: class A, B, and C investors. Each class receives principal payments in a different order but receives interest payments until it is paid off completely. Class A investors are paid out first with prepayments and repayments until they are paid off. Next come class B investors, followed by class C investors. In a situation like this, class A investors bear most of the prepayment risk and class C investors bear the least.

Related Terms:
• Asset-Backed Security
• Collateralized Debt Obligation—CDO
• Mortgage
• Mortgage-Backed Securities—MBS
• Tranches