collateralized mortgage obligation

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Collateralized mortgage obligation (CMO)

A security backed by a pool of pass-through rates, structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security.

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.

collateralized mortgage obligation (CMO)

A security collateralized with mortgage loans and issued by Freddie Mac. Although collateralized in a manner similar to a Freddie Mac pass through, a CMO provides interest and principal payments in a more predictable manner. CMOs are classed according to expected maturity ranges at the time of issue. The greater certainty of payment size is offset by slightly lower yields compared with ordinary pass throughs. Compare collateralized bond obligation. See also planned amortization class, targeted amortization class bond, Z-tranche.

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.

collateralized mortgage obligation (CMO)

A security or bond backed (collateralized) by a pool of mortgages.The issuer of the security segmented the cash flow in such a manner that it could create bonds with maturities at differing dates and appeal to a broad spectrum of investors.Today,the CMO has largely been replaced by the REMIC—real estate mortgage investment conduit—although the terms are often used interchangeably.

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