Collateralized Mortgage Obligations (CMOs)
Chapters in this video
- 0:00 CMOs as multi-class securities that redirect mortgage cash flows
- 1:57 CMOs redistribute but never eliminate prepayment risk
- 3:07 PAC tranches and dual-sided protection
- 4:01 TAC tranches and single-sided contraction protection
- 4:27 Companion tranches absorb chaos to protect PAC
- 5:17 Z-tranches, sequential-pay structure, and cleanup calls
- 7:19 Rapid-fire exam recap
What this video covers
- How collateralized mortgage obligations (CMOs) restructure mortgage pass-through cash flows into tranches with different maturities and risk profiles
- Why CMOs redistribute prepayment risk but never eliminate it, and how to spot this classic exam trap
- The two directions of prepayment risk: contraction risk (rates fall, refinancing surges) versus extension risk (rates rise, refinancing dries up)
- How Planned Amortization Class (PAC) tranches use a prepayment band to provide dual-sided protection against both contraction and extension risk
- Why Targeted Amortization Class (TAC) tranches only protect against contraction risk, not extension risk, and where they sit in the risk-yield spectrum
- The role of companion (support) tranches in absorbing variable cash flows to protect PAC tranches, and why companions carry the highest risk and highest yield
- The 30/360 day count convention for CMO accrued interest versus actual/actual for U.S. Treasuries, plus the 10% cleanup call threshold
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