[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"detail-sidebar-cat-0-en-105":3,"doc-seo-326110-105":59,"doc-detail-326110-en":131},{"code":4,"msg":5,"data":6},0,"success",[7,13,18,23,28,33,38,43,48,51,55],{"id":8,"doc_module":4,"doc_module_name":9,"category_name":10,"show_sort_weight":11,"slug":12},1,"Document","Story & Novel",90,"story-novel",{"id":14,"doc_module":4,"doc_module_name":9,"category_name":15,"show_sort_weight":16,"slug":17},2,"Literature",80,"literature",{"id":19,"doc_module":4,"doc_module_name":9,"category_name":20,"show_sort_weight":21,"slug":22},4,"Exam",70,"exam",{"id":24,"doc_module":4,"doc_module_name":9,"category_name":25,"show_sort_weight":26,"slug":27},5,"Comic",60,"comic",{"id":29,"doc_module":4,"doc_module_name":9,"category_name":30,"show_sort_weight":31,"slug":32},6,"Technology",50,"technology",{"id":34,"doc_module":4,"doc_module_name":9,"category_name":35,"show_sort_weight":36,"slug":37},7,"Healthcare",40,"healthcare",{"id":39,"doc_module":4,"doc_module_name":9,"category_name":40,"show_sort_weight":41,"slug":42},8,"Research & Report",30,"research-report",{"id":44,"doc_module":4,"doc_module_name":9,"category_name":45,"show_sort_weight":46,"slug":47},9,"Religion & Spirituality",20,"religion-spirituality",{"id":46,"doc_module":4,"doc_module_name":9,"category_name":49,"show_sort_weight":46,"slug":50},"World Cup","world-cup",{"id":52,"doc_module":4,"doc_module_name":9,"category_name":53,"show_sort_weight":52,"slug":54},10,"Lifestyle","lifestyle",{"id":56,"doc_module":4,"doc_module_name":9,"category_name":57,"show_sort_weight":24,"slug":58},19,"General","general",{"code":4,"msg":60,"data":61},"ok",{"site_id":62,"language":63,"slug":64,"title":65,"keywords":66,"description":67,"schema_data":68,"social_meta":124,"head_meta":126,"extra_data":128,"updated_unix":130},105,"en","derivative-mechanics-the-cmo","Derivative Mechanics: The CMO","","Derivative Mechanics: The CMO explains how collateralized mortgage obligations translate mortgage-backed security cash flows into tranches with differing maturities. It begins with the securitization of ordinary mortgages into pass-through securities, then shows how CMOs were designed in 1983 to improve stability and predictability. The article analyzes ongoing exposure to interest-rate risk and pre-payment risk, including extension and reinvestment effects that can dominate gains or losses.",{"@graph":69,"@context":123},[70,84,106],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/derivative-mechanics-the-cmo/326110/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/derivative-mechanics-the-cmo/326110.png","ImageObject",300,407,{"name":92,"@type":93},"Aurelia","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-23","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":105},"InteractionCounter",{"@type":104},"ViewAction",11,{"@type":107,"mainEntity":108},"FAQPage",[109,115,119],{"name":110,"@type":111,"acceptedAnswer":112},"What problem do CMOs address in mortgage-backed securities?","Question",{"text":113,"@type":114},"CMOs were developed to reduce the uncertainty created by pass-through securities’ long maturities and the mismatch between expected and actual payment schedules caused by prepayments.","Answer",{"name":116,"@type":111,"acceptedAnswer":117},"How do CMO tranches differ in repayment?",{"text":118,"@type":114},"CMO tranches receive interest according to their terms, but principal is repaid sequentially—first to the first tranche until it is paid off, then to the next tranche.",{"name":120,"@type":111,"acceptedAnswer":121},"What risks remain for CMOs even after restructuring?",{"text":122,"@type":114},"CMOs still face interest-rate risk and pre-payment risk. Changes in prepayment behavior create extension risk and can also introduce reinvestment risk that may offset or dominate interest-rate-driven price effects.","https://schema.org",{"og:url":83,"og:type":125,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":127,"canonical":83},"index,follow",{"doc_id":129,"site_id":62},326110,1790213277,{"code":4,"msg":5,"data":132},{"doc_id":129,"user_id":133,"nickname":92,"user_avatar":134,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":135,"file_id":136,"file_url":137,"file_type":138,"file_size":139,"view_count":105,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":140,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":141,"faqs":142,"seo_title":143,"seo_description":67,"update_tm":144,"read_time":145,"preview_page_count":4},1099514068365,"https://ap-avatar.wpscdn.com/avatar/10000253d8d9f28188e?x-image-process=image/resize,m_fixed,w_180,h_180&k=1794309523707217728","by Joseph G.Haubrich  \nThe curent interest infinancial deriva-tives sometimes appears to be driven bythe same tastes that support police anddoctor dramas on television:manycrashes and a lot of blood.Though unde-niably exciting,such shows do not teachyou how to drive safely or how to ad-minister first aid.Likewise,a concentra-tion on the blowups of financia deriva-tives slights the more basic informationneeded for policy decisions or corporaterisk management.  \nThis Economic Commentary looks underthe hood of one particularly importanttype of financial derivative,the Collater-alized Mortgage Obligation,or CMO(sometimes known as a REMIC,or RealEstate Mortgage Investment Conduit').CMOs have prominence both because oftheir wide use($650 billion in 1994)andbecause of their role in a series of majorfinancial setbacks.Wall Street profes-sionals,including the investment bank ofKidder Peabody and mortgageguru LewRanieri's Hyperion Capital Management,lost money investing in CMOs.So didsmall towns and counties(some as closeto home as Sandusky County and Jack-son,Ohio),colleges,and even an Indianreservation.²To understand what wentwrong,it is necessary to understand howCMOs work.This,too,has its own re-wards,at least for those whose taste runsmore toward the dazzle of gleaming ma-chinery and the challenge ofcomplexity.  \n# Derivative Mechanics:The CMO\n\n■ Mortgage-Backed Securities  \nThe story begins as ordinary mortgagesbecome securitized,or bundled into apool and then sold.It's a bit ironic thatsome of the most sophisticated financialderivatives ultimately depend on a verycommon,even mundane,instrument—the homeowner's mortgage.These mort-gages provide the underlying collateralbacking up the security.  \nThe first type of mortgage-backed secu-rity,still quite common,is the “pass-through.\"Investors get a pro rata shareof payments—some fraction of themonthly mortgage payments made bythe myriad homeowners in the pool.Since each monthly payment includesboth principal and interest,investors geta mixture of those elements “passedthrough\"from the homeowners.Thispresents a problem in that the securityhas a very long maturity—it takesyears unti the last homeowner com-pletely pays off the last mortgage andreturns the fullvalue of the principal.Since homeowners have the option topre-pay their mortgages,pass-throughsalso face the risk that payments mayarrive on a different schedule thaninvestors initially expected.  \nIn the summer of 1983,market partici-pants developed the CMO to solve theseproblems.CMOs break the mortgage-backed security into a series of bondsknown as “tranches”(French for trench).Each tranche gets its share of interestpayments,but the principal is repaidsequentially.That is,principal paymentsgo exclusively to the first tranche until it  \nCollateralized mortgage obligations(CMOs),first introduced in 1983,area form of financia derivative createdto provide more stability and pre-dictability for those investing in mort-gage assets.Although some investorshave profited handsomely fromCMOs,others have lost millions ofdollars.This article describes howCMOs work,looking at both theiradvantages and disadvantages,andexplains how even savvy,seasonedmarket participants have gotten intotrouble by investing in these interest-rate-sensitive financial instruments.  \nis paid off,then to the second trancheuntil it is paid off,and so forth.Thisbreaks the security into several shorterbonds(see figure 1).For example,aninvestor holding $10 million of a$100million pass-through would not get all ofhis principal back until every mortgagehad been paid off.The holder of a$10million first tranche,by contrast,wouldget his principal back from the first $10million paid.This structure makesCMOs derivatives:Their value dependson,or derives from,the value of theunderlying mortgage pool.³  \n## ■ Risk Remains\n\nThe standard CMO still exhibits twotypes of riskInterest-rate risk existsbecause market rates can change,mak-ing the present value of the paymentstream worth diff","cbCairFLIOLiaON3","https://ap.wps.com/l/cbCairFLIOLiaON3","pdf",1252538,"English","# Derivative Mechanics: The CMO\n## Mortgage-Backed Securities\n## Risk Remains","[{\"question\":\"What problem do CMOs address in mortgage-backed securities?\",\"answer\":\"CMOs were developed to reduce the uncertainty created by pass-through securities’ long maturities and the mismatch between expected and actual payment schedules caused by prepayments.\"},{\"question\":\"How do CMO tranches differ in repayment?\",\"answer\":\"CMO tranches receive interest according to their terms, but principal is repaid sequentially—first to the first tranche until it is paid off, then to the next tranche.\"},{\"question\":\"What risks remain for CMOs even after restructuring?\",\"answer\":\"CMOs still face interest-rate risk and pre-payment risk. Changes in prepayment behavior create extension risk and can also introduce reinvestment risk that may offset or dominate interest-rate-driven price effects.\"}]","Derivative Mechanics: The CMO | PDF",1789972232,13]