Collateralized Mortgage Obligation
Collateralized Mortgage Obligation CMO
Collateralized Mortgage Obligation. A security backed by a pool of pass-throughs, structured so that there are several classes of bondholders with varying maturities. These classes represent separate prioritized claims, called tranches, issued off of a portfolio of mortgages. 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.
Tranches offer widely divergent risk-return profiles with different exposures to interest rate and prepayment risks. Some tranches receive principal only, some receive interest only. Some receive principal and interest and, when fully repaid, others then step in line to receive principal and interest. Some have a limited degree of protection against principal repayments. Still others have a claim on any residual value after all other tranches are paid off.
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