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Collateralized Mortgage Obligations (CMOs)
Description

Collateralized Mortgage Obligations are derivative debt securities that are backed by a portfolio of mortgage loans. A CMO is a security carved out of a pool of mortgage-backed securities or mortgage loans themselves. CMOs were developed to offer a wider range of investment time frames and greater cash flow certainty than was typically available with original mortgage-backed securities.

Unlike most fixed-income products, CMOs typically mature based on their "average life" rather than the stated maturity date. Since CMOs are based on mortgage payments including principal and interest components, a CMO matures when you receive the final principal payment. The average life is the average time it takes for mortgages in the underlying pool to be "paid off," based on certain assumptions about mortgage prepayment speeds. If prepayment speeds are faster than expected (typical in declining interest rate environments), the average life of the CMO will be shorter than the original estimate. If prepayment speeds are slower (typical in rising interest rate environments) the CMOs average life will be extended.
Benefits

  • Enjoy a steady source of income.
  • CMOs enable the issuer to direct principal and cash flow to meet your specific investment objectives.


Features

  • CMOs are investments generally regarded with a high degree of safety. The majority of outstanding mortgage-backed securities are issued by U.S. Government agencies with credit quality typically considered equivalent to securities rated triple-A.
  • Yields on CMOs are generally higher than other fixed income products due to increased prepayment risk.
  • If circumstances change, CMOs are actively traded in the market and are easy to liquidate.
  • CMOs have a low minimum investment, $1000.
  • You receive monthly payments of principal and interest.


Related Products/Services

Certificate of Deposit
Defined Portfolios
Government Agency Securities
Mortgage Pass-Through Securities
Municipal Securities
Preferred Securities
U.S. Treasury Securities
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