collateralized mortgage obligation ( CMO)
A type of MBS created by dividing the rights to receive the principal and interest cash flows from an underlying pool of mortgages into separate classes or tiers. The tiers or classes are usually called tranches. In other words, it is a multiclass bond backed or collateralized by mortgage loans or mortgage pass-through securities. A given tranche is typically not redeemed until all bonds with earlier priority have been redeemed. By dividing the cash flows into one or more tranches with shorter terms, the risk resulting from the potential volatility from future changes in prevailing rates is shifted away from the shorter-term tranche or tranches and onto the longer-term tranches and the residual tranche. American Banker Glossary
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( CMO)
A security backed by a pool of pass-through rates , structured so that there are several classes of bondholders with varying maturities ( maturity), called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security. Bloomberg Financial Dictionary
Financial and business terms. 2012.