13_Fixed_Income_Portfolios

Cmo structure example sequenal pay tranches enre

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Unformatted text preview: s in propor:on to their stakes •  Collateralized Mortgage Oblica:ons (CMOs): cash flows are distributed to different bond classes aka tranches –  most junior (“equity tranche”): highest risk, highest yield –  most senior: lowest risk, lowest yield •  Many different ways of structuring a CMO. CMO Structure Example: Sequen:al- Pay Tranches •  En:re principal payment, including prepayments, always goes to the most senior tranche whose principal has not been paid in full- - - un:l it is paid in full. •  Promised interest payments are made to the more senior tranches first. Collateralized Debt Obliga:ons (CDOs) •  Backed by a porIolio of ABS tranches •  E.g., a porIolio of BBB tranches from many different ABS’s Default dependencies •  In each case,...
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