ADM 3351 Lecture Notes - Lecture 12: Leveraged Buyout, Rjr Nabisco, Weighted Arithmetic Mean

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Cmos redirect cash flows from a pass-through to various bond classes making it possible to redistribute prepayment risk for investors who want to reduce their exposure to prepayment risk. A cmo is called a pay-through structure because it can satisfy the definition that when there is more than one class of bondholders with the same level of credit priority, the structure is called a pay-through structure. A cmo is a security backed by a pool of pass-throughs, whole loans, or stripped mortgage-backed securities (explained later in the chapter). Cmos are structured so that there are several classes of bondholders with varying stated maturities. The bond classes created are commonly referred to as tranches. A cmo redirects cash flows making it possible to redistribute prepayment risk so that some investors reduce their prepayment risk exposure while others increase their prepayment risk exposure. Cmos are customized securities in the sense that they can be tailor made to satisfy the preferences of investors.

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