COLLATERALIZED MORTGAGE OBLIGATION (CMO)

A SECU RITIZATION structure that repackages pools of MORTGAGE BACKED SECURITIES, WHOLE LOANS, or mortgagebacked STRIPs into TRANCHES with specific RISK and return (YIELD) profiles. CMO structures are available in many different forms, some of them esoteric, risky, and ILLIQUID. However, the largest portion of the market is centered on standard instruments with reasonable RISK and LIQUIDITY parameters. The most common version of the CMO is based on sequential pay tranching, with COUPON payments, and then PRINCIPAL payments, allocated to investors in order of priority. Once all the tranches have been retired in sequence, the remaining ACCRUAL BOND (ZBOND) is paid; since the accrual bond receives no CASH FLOWS until all others have been paid, it protects the cash flow payment stream for the entire structure. See also COMPANION BOND, INTERESTONLY STRIP, PLANNED AMORTIZATION CLASS BOND, PRINCIPAL ONLY STRIP, TARGETED AMORTIZATION CLASS BOND.

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