What are the differences between CDOs and CMOs?


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?
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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.
Reply to
2.7182818284590...
I will attempt to answer your ? with a ?
One is a dog, the other is a cat. Both are in opaque bags. Both have been judged as champions by judges now deemed mentally incompetent. The entire world is now allergic to small animals of any type and the rabies vaccines found to be ineffective.
Disclosure: I own Cats and dogs. One of my Cats has 4WD, 90HP and an extendahoe feature. Not all my dogs are barking.
Confused? Irrational? Welcome to the world of 3 card monty finance. An industry founded on trust has been found to be devoid of honesty.
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BuffetHater

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