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Collateralized Mortgage Obligations (CMOs)

Collateralized mortgage obligations (CMOs) are a type of mortgage-backed security that is created with the prime motive of redistributing the prepayment risk to different classes of bondholders. Let’s take a detailed look at how this works. As we learned before, in a pass-through security, the monthly cash flow (scheduled interest, scheduled principal, and unscheduled prepayments)

Collateralized Mortgage Obligations and Prepayment Risk

Collateralized Mortgage Obligations are a type of Special Purpose Vehicle (SPV), which is separate from the entity that created it. The CMO is created to issue securities to different investors based on a pool of mortgages owned by the SPV. All the mortgages put together are called a pool. In a CMO the investors buy

Mortgage Pass-through Securities

Mortgage-backed securities are one of the many financial innovations born in the US financial markets. The mortgage-backed securities provided a way for investors to get access to a new and untapped source of investment – mortgage loans. In simple words, a mortgage-backed security (MBS) is a security sold to investors, whose cash flow is backed

Securitisation of Subprime Mortgage Credit

This reading is a part of the syllabus for FRM Part 2 Exam in the section ‘Credit Risk Measurement and Management This paper covers the following: An overview of the subprime mortgage securitization process and the seven key informational frictions which arise How market participants work to minimize these frictions and speculate on how this

Structured Nonagency IO Tranches

As we know, an interest only (IO) strip is a class of security that receives its payments only from the interest payments on the underlying mortgage. An interest only tranche will typically benefit from rising interest rates and slowing of prepayment rates. IO tranches can also be created from non-agencies securities. A non-agency security would

Interest-only Stripped Mortgage-backed Security

The mortgage-backed securities (MBS) were the result of financial innovation at investment banks to meet the growing needs to the investors in the fixed income market. As we know, mortgage backed securities are a type of asset-backed securities in which the cash flows to the investors are provided from the cash flows from the underlying

Financial Risks in Mortgage-Backed Securities

Mortgage-Backed Securities (MBS) are a very important class of financial instruments and played a significant role in the recent financial crisis. This presentation from a GARP Chapter Meeting provides an overview of the MBS products and the financial risks associated with them.

Revolving Credit Card Receivables Securitization

Unlike closed-end installment loans, revolving credit receivables involve greater uncertainty about future cash flows. Therefore, ABS structures using this type of collateral must be more complex to afford investors more comfort in predicting their repayment. Accounts included in the securitization pool may have balances that grow or decline over the life of the ABS. Accordingly,

Asset-Backed Securities (Installment Loans)

Asset-backed securities can have a variety of underlying collateral and its terms and features are customized based on the underlying collateral. One of the commonly used collateral installment receivables such as automobile-finance receivables. The securities backed by closed-end installment loans are the least complex forms of asset-backed securities. These installment loans could include leases, automobile

Credit Derivative Trading Strategies

Basis Trades: Made based on the difference between a bond’s yield and the CDS premium. Curve Trades: Flattener: Buy the short term CDS and sell the long term CDS Steepener: Sell the short term CDS and buy the long term CDS Index Trades: An investor can buy or sell a credit index CDS Basket Trades