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Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved


Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.


See collateralized mortgage obligation.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
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