Just like a support bond, a CMO reduces the uncertainty concerning the maturity of a tranche, thereby providing a risk/return pattern not available with typical mortgage pass-through securities.

Question

Quizplus · Accepted Answer

A CMO (Collateralized Mortgage Obligation) is designed to distribute prepayment risk among different tranches, but it does not necessarily reduce maturity uncertainty for all tranches. Some tranches may have more predictable cash flows, while others may have increased uncertainty compared to typical mortgage pass-through securities.

Just Like a Support Bond, a CMO Reduces the Uncertainty