On the market is a recently introduced mortgage-backed security called the collateralized mortgage obligation (CMO). This security was created to relieve investors of prepayment uncertainties that arise when homeowners refinance their mortgages. Mortgage pool payments are divided into sections called tranches (French for "slices") of principal and interest payments. Individuals invest in these tranches based on their desired maturities. This way, CMOs pay interest to all their investors, but principal payments are paid out in the order of maturity.
The collateral on these bonds is a pool of mortgages that a trustee holds. Collateralized mortgage obligations are complex investments with varying degrees of risk.
Agency Bonds and Mortgage-Backed Securities >>