Collateralized Mortgage Obligation (Cmo)
| A collateralized mortgage obligation (CMO) is a type of mortgage-backed security that is made up of a pool of mortgages. The mortgages are sold to investors, and the CMO is used to provide them with a stream of interest payments. The CMO is structured so that the interest payments are made to the investors in a way that is determined by the structure of the CMO. The structure of a CMO can be very complex, but the basic idea is that the CMO is divided into a number of different tranches, each of which has a different interest rate and maturity date. The CMO is a popular investment because it offers a high degree of safety and a relatively high return. The return on a CMO is higher than the return on a similar investment that is not backed by collateral, such as a corporate bond. The safety of a CMO comes from the fact that the payments on the underlying mortgages are used to make the interest payments to the investors. If the underlying mortgages default, the CMO will still make the interest payments to the investors. The CMO is not without risk, however. The most important risk is interest rate risk. This is the risk that interest rates will rise, and the value of the CMO will fall. This risk can be mitigated by investing in CMOs with different interest rates and maturities. Another risk is credit risk, which is the risk that the borrowers will default on their mortgages. This risk can be mitigated by investing in CMOs that are backed by high-quality mortgages. |
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