Collateralized mortgage obligations (cmos), Financial Management

Assignment Help:

Collateralized Mortgage Obligations (CMOs)

CMOs retain many of the yield and credit quality advantages of pass-throughs, while eliminating some of the less desirable elements of the traditional mortgage-backed security. CMOs are bonds or debt obligations issued by mortgage originators by offering whole loan mortgages or mortgage pass-through securities as collateral. The cash flows generated by the assets in the collateral pool are first used for paying interest and then pay principal to the CMO bondholders.

The major difference between traditional pass-throughs and CMOs lies in the principal payment process. In case of pass-through securities, each investor receives a pro rata distribution of any principal and interest payments (net of servicing fees) made by the homeowner. Since mortgages are self-liquidating assets, the holder of a pass-through receives some return of principal each month. Until all the mortgages in the pool are finally retired, complete return of principal and the final maturity of the pass-through does not occur. Thus, a large difference between average life and final maturity is created and there is a great deal of uncertainty with regard to timing of principal return under a pass-through security.

CMOs avoid the problems underlying pass-throughs by issuing bonds in groups and each group is referred to as 'tranche'. This security allows distribution of various risks among the different kinds of bond holders. Further, these securities also satisfy the asset/liability requirements of the institutional investors.

The CMO structure offers issuers a flexible tool with which to design tranches to meet investor needs and respond to market conditions. There are a wide range of CMO tranches designed to reduce an investor's exposure to prepayment risk. The tranche types are defined according to general characteristics; however, investors should carefully evaluate how the security is likely to perform under a range of economic assumptions. Let us go through some of the major ones:

  1. Sequential-Pay Tranche
  2. Planned Amortization Class (PAC) Tranche 
  3. Support or Companion Tranches
  4. Accrual Bonds (Z tranches)
  5. Floating-rate Tranches

Related Discussions:- Collateralized mortgage obligations (cmos)

First, how do you calculate the current ratio

how do you calculate the current ratio

Incremental cost, Incremental Cost The measured change in a firm's cos...

Incremental Cost The measured change in a firm's cost of production due to an additional activity pursued by the firm. Incremental costs can be measured by the cost difference

Walter''s Model, Explain the effect of different dividend policies on the v...

Explain the effect of different dividend policies on the value of share respectively as per the walter model in Case 1: Dividend payout ratio is 50% Case 2: Dividend payout ratio

Importance of the government securities markets, Need to Widen and Deepen t...

Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove

Accounting framework - convention of materiality, Accounting Framework - Co...

Accounting Framework - Convention of Materiality Materiality means relative significance. In other words whether a matter should be disclosed or not in the financial statement

Define advantages and the disadvantages of a new stock issue, What are the ...

What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and reduces the riskiness of the firm. It as well tends to send a negative

Establish budgets and allocate funds, 1. Allocate resources to different de...

1. Allocate resources to different departments by taking information from previous financial data. 2. What would be the estimated cost of new allotted resources to be included i

Public finance, explain in detail the primary function of taxation in relat...

explain in detail the primary function of taxation in relation to public fianace

Managing finance, Read the journal article Lafferty, B. A., & Hult, G. T. M...

Read the journal article Lafferty, B. A., & Hult, G. T. M. (2001) ‘A synthesis of contemporary market orientation perspectives’, European Journal of Marketing, 35 (1/2), pp. 92–109

How much your investments will be worth at retirement time, Suppose you are...

Suppose you are planning to make regular contributions in equal payments to an investment fund for your retirement. Which formula would you use to figure out how much your investme

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd