What are the differences between CDOs and CMOs?

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What are the differences between CDOs and CMOs?

tangent1.57 10-12-2008, 9:32 AM | Post #2576147 | 3 Replies

I am thinking that CDO/CMO are a subsect of MBS, but the basic principles behind them are the exact same. The CDO/CMO is an MBS which has tranches (classes), and this is what seperates them. However, what are the differences between a CMO and a CDO? They sound identical. They both have tranches which caters to different investor preferences. Also, according to the definition of CDO, they are unregulated. Oh, is this so? How does the fact that they are unregulated affect their characteristics when compared to regulated bonds? ------------------------------------------------------------------------------------------------------------------------------------------------------------------- CDO - Collateralized debt obligation CMO - Collateralized mortgage obligation MBS - Mortgage backed security CDO - Collateralized debt obligations (CDOs) are an unregulated type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided by the ratings firms that assess their value into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. CMO - Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, the bonds are called tranches (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. MBS - A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.

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Re: What are the differences between CDOs and CMOs?

Bulllwinkle 10-12-2008, 9:50 AM | Post #2576161

I think there are other forums like dividend investing & personal finance that would get you some good answers. A lot of the posts in this off-topic forum are goofy ones - like the ones i post about watermelon rind, etc. Peace Bullwinkle

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Re: What are the differences between CDOs and CMOs?

HettyGreen 10-12-2008, 11:23 AM | Post #2576217

True, this forum can be more like the equivalent of the old-fashioned gossip over the back fence or yapping on a party line.

;)

Hetty

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Re: What are the differences between CDOs and CMOs?

Bulllwinkle 10-12-2008, 11:44 AM | Post #2576233

God Almighty - a phone with a party line! Forgot all about them. Here's one - i can remember ice trucks in the alleys of Chicago delivering ice to homes - if that was somewhere between 1949-51, i wonder if those houses didn't have plug in fridges, or if the ice was just for coolers to be used for drinks (hard or soft) Bullwinkle

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