Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
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:
Name two patterns of cash flows for a share of common stock. How does the market determine the value of the most common cash flow pattern for common stock? Cash flows for a sha
What is Financing Decision Provision of funds required at proper time is one of theprimary tasks of finance manager. Identification of the sources, deciding whichtypes of fu
Modern / Discounting Cash Flow Techniques : These methods generally are of more use to businesses in their investment decisions. They take into account the time value of money and
Types of Efficiency Efficient market theory can be described in three ways: 1) Allocative Efficiency: A market is allocatively proficient when it directs savings tow
COST OF CAPITAL A project's Cost of Capital is the smallest amount of acceptable rate of return/required rate of return on funds committed to the project. It is a compensation
what are the key stages in capital investment decision-making process and the role of investment appraisal in this process?
what is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million,if the average interest rate on debt is 8.5% and the marginal tax rate i
Residual Method We know that a time series consisting of annual data for longer periods is depicted by trend lines. This facilitates us to isolate the component of secular tre
To obtain an investment credit rating and make the transaction attractive to the investors, some type of credit enhancement procedure is usually necessary. In ord
Explain how to measure the firm risk of a capital budgeting project. The firm risk of a capital budgeting project calculates the impact of adding a new project to the existing pr
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!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd