Collateralized Mortgage Obligations (CMOs) are collateralized by mortgages or mortgage-backed securities and have a stated maturity; principal payments are directed to the newest maturity.

• A. They are backed by a pool of car loans; payments go to oldest maturity
• B. They are collateralized by mortgages and have a stated maturity; principal payments go to newest maturity
• C. They are backed by government securities; no principal payments
• D. They are currency-denominated bonds with floating rates

Answer: (B)

Collateralized Mortgage Obligations are mortgage-backed securities that are created from a pool of mortgages or mortgage-backed securities and are issued with a stated maturity. The distinctive feature is the cash-flow waterfall that directs principal payments to the tranche with the newest maturity, so each tranche has a defined path to receive principal as prepayments occur. This structure allows CMOs to offer investors exposure to different expected durations and risk levels within a single security. The other statements misstate what backs CMOs, ignore the principal-payment waterfall, or describe instruments that don’t fit how CMOs operate.