The first tranche of a collateralized mortgage obligation has

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The first tranche of a collateralized mortgage obligation (CMO) has the greatest prepayment risk because it receives payments from the earliest maturing mortgages in the pool, which are more likely to be paid off early if interest rates fall or if homeowners refinance. This prepayment risk can impact the expected cash flows for investors in the first tranche. Default risk and interest rate risk are spread out among the different tranches of a CMO based on their priority of payment and maturity structure. Total risk can vary depending on the specific structure of the CMO and underlying mortgages.

The First Tranche of a Collateralized Mortgage Obligation Has