Ch2 S8

Front 1

CMO

Back 1

A bond that is secured by a pool of mortgage lonas

Front 2

Basic facts about CMOS

Back 2

1.Historicall, have been safe investments
2.Provide secure income on a MONTHLY basis
3.For investors in all tax brackets, but often used by those in low tax brackets
4.Interest is paid at a fixed coupon rate over life(subject to fed and state tax).
5.Principal is paid in varying amounts over life.

Front 3

Issuers of CMOs

Back 3

1.Ginnie Mae, Fannie Mae, Freddie Mac
2. FHA mortgage loans
3. Conventional/private mortgage issuers

Front 4

Planned Amortization class

Back 4

CMOs which most resemble bonds bc they have a sinking-fund structure,they will receive payments over a predetermined period with a stable cash flow.
-PACs have less than avg exposure to call risk

Front 5

Tranche info

Back 5

1.Interest pays monthly.
2.Principal payments and pre payment pay off 1 tranche at a time in order of maturity.
3.A Z-BOND is the final tranch of a CMO. Holders of Z BONDS receive no cash until all tranches are paid.
4. Tranches that pay a variable rate of interest are usually tied to the LIBOR

Front 6

Risk considerations for CMOs

Back 6

1.Credit risk
-Riskier than us treasuries
2.Interest rate and market risk
-If rates decline, prices will increase and mtgs refinanced and PREPAYMENT occurs.
3.Risks associated w maturity
-A. Implied call risk
-B.Extension Risk

Front 7

Implied call risk

Back 7

(Pre-Payment Risk)-Principal will be returned sooner due to sharp int rate declines.

Front 8

Extension risk

Back 8

Maturity may be extended longer than expected

Front 9

CMO Advertising requirements

Back 9

1. Must not contain comparison to any other investments
2.Must prominently display the final maturity date of the security
3.Must incled a discription of the intitial issue tranche.