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)

Evaluate net present value of machine, Kenneth Su Gold Corp (KSGC) is consi...

Kenneth Su Gold Corp (KSGC) is considering the purchase of a new piece of machinery. The new machinery would cost $80,000. You are given the following facts: The new machine

Outline the objectives of alm, You are a member of the ALM Committee (ALCO)...

You are a member of the ALM Committee (ALCO) of ANZ Bank. A visiting member has some queries relating to the general framework of the ALM and interest rate risk impact on the incom

Currency, You have the following limited information upon which to base you...

You have the following limited information upon which to base your decision as to which is the better of two alternative funding arrangements: ? Alternative 1 is to arrange funding

Discount and premium, What is the  Discount and Premium? Describe please.

What is the  Discount and Premium? Describe please.

International strategic management, undertake a critical review of the curr...

undertake a critical review of the current academic literature to determine the reasons for benefits of and the costs to companies of cross listing.

Amortizing/non-amortizing assets, The asset that acts as a coll...

The asset that acts as a collateral for an asset-backed security can either be an amortizing or a non-amortizing asset. In an amortizing asset,

First, how do you calculate the current ratio

how do you calculate the current ratio

Expected return of your portfolio, You own three stocks: 1000 shares of App...

You own three stocks: 1000 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5000 shares of Goldman Sachs Group. The current share prices and expected returns of Apple,

Mid term quiz, iau.la/im/fin500.pdf need help with 100 questions with multi...

iau.la/im/fin500.pdf need help with 100 questions with multiple answers quiz!

Assessment of in individual strengths and weaknesses, Assessment of in indi...

Assessment of in individual strengths and weaknesses Before finalizing career plan for an individual and placing him on career path, it is necessary to access his strengths and

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