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.