PPT Slide
Collateralized mortgage obligations
Redirect the cash flows (interest and principal) to different bond classes,
called tranches so as to mitigate different forms of prepayment risk.
• The creation of a CMO cannot eliminate prepayment risk. It can
only redistribute prepayment risk among different classes of bond
• CMO class has a different coupon rate from that for the underlying
collateral, resulting in instruments that have varying risk-return
characteristics that fit the needs of fixed-income investors.