Chapter 14: Collateralized Mortgage Obligations (CMOs)

In this section

• CMO Tranches: Sequential, PAC, Support
  Dive into Sequential-Pay, PAC, and Support tranches in CMOs, exploring structure, cash flows, prepayment risks, and valuation metrics.
• PAC Collar, Support Bonds, and Extension Risk
  Explore how PAC collars are designed, how support bonds maintain cash flow stability, and the implications of extension risk in CMOs.
• Valuing CMOs in a Changing Rate Environment
  Gain a comprehensive understanding of how Collateralized Mortgage Obligations (CMOs) are valued when interest rates change. Learn about prepayment modeling, option-adjusted spread, negative convexity, and advanced simulation techniques to better analyze and manage CMO investments.
• Vignette: Allocating Cash Flows to Tranches
  Explore a practical CMO scenario involving sequential, PAC, and support tranches, step-by-step cash flow allocation, and the impact of varying prepayment speeds on each tranche’s average life. Includes theoretical insights, best practices, examples, and final practice questions.