Define: Cmo

A CMO, or collateralized mortgage obligation, is a type of mortgage-backed security that is created by pooling together a group of mortgages and then dividing them into different classes or tranches.

Investors purchase different tranches of a CMO, each with its own level of risk and return. As the underlying mortgages are paid off, the cash flows are distributed to the different tranches in a specific order, based on their priority.

The main risks associated with investing in a CMO include prepayment risk, interest rate risk, and credit risk.

CMOs are typically sold to institutional investors, such as banks, insurance companies, and pension funds. However, some CMOs may also be available to individual investors through mutual funds or exchange-traded funds.

Yes, CMOs are regulated by the Securities and Exchange Commission (SEC) and must comply with federal securities laws.

Yes, a CMO can default if the underlying mortgages default or if the cash flows are not sufficient to pay the interest and principal payments on the different tranches.

If a CMO defaults, the investors in the lower tranches may lose some or all of their investment, while the investors in the higher tranches may still receive their payments.

The tax treatment of CMOs depends on the specific structure of the security and the investor’s tax situation. Generally, the interest income from a CMO is taxable as ordinary income.

Yes, CMOs can be bought and sold on the secondary market, but the price may be affected by changes in interest rates and other market conditions.

The decision to invest in a CMO depends on your individual financial situation, risk tolerance, and investment goals. It is important to carefully consider the risks and potential returns before making any investment decisions.