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Types of Bonds

The CMO: An Overview

Collateralized Mortgage Obligations (CMOs)1—also known as Real Estate Mortgage Investment Conduits (REMICs)—are one of the most innovative investment vehicles available today, offering regular payments, relative safety, and notable yield advantages over other fixed-income securities of comparable credit quality.

$222.3 billion in new agency CMOs were issued in 2007, bringing the total volume of outstanding securities to nearly $1.34 trillion as of December 31, 2007. A wide variety of CMO securities with different cash flow and expected maturity characteristics have been designed to meet specific investment objectives. While CMOs offer advantages to investors, they also carry certain risks, which are explained later. To determine if CMOs have a place in your portfolio, you should first understand the distinctive features of these securities.

CMO Outstanding 2008

1 CMOs were first introduced in 1983. The Tax Reform Act of 1986 allowed CMOs to be issued in the form of Real Estate Mortgage Investment Conduits (REMICs), creating certain tax and accounting advantages for issuers and for certain large institutional and foreign investors. Today, almost all CMOs are issued in REMIC form. In this overview, as in common market usage, the terms “REMIC” and “CMO” are interchangeable, except where otherwise noted.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.