Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• COLLATERALIZED MORTGAGE OBLIGATION (CMO)
  
  CMOs are fixed-income investments backed by mortgages or pools of mortgages. Unlike a conventional mortgage-backed security, which has an interest rate and maturity date, the pool of mortgages behind a CMO is subdivided into four tranches, each with a different interest rate and what is known as an average life. Owners of the first three tranches receive regular payment of principal and interest, while the fourth tranche is a zero coupon where interest accrues but is not paid until maturity. As is the case with all mortgage-back securities, a drop in interest rates may mean that mortgages are paid off more rapidly than expected as homeowners refinance. But with a CMO, all early repayments of principal go to owners of the first tranche until it is repaid, then to the owners of the second tranche, and so forth. That provides a longer income period for investors holding the tranches with later maturities. CMOs usually involve high-quality mortgages, or those guaranteed by the government. Their yield may be lower than those of other mortgage-backed investments, but the way in which they are repaid makes them especially attractive to institutional investors including insurance companies and pension funds.
  
  Back