Summary of Collateralized Mortgage Obligations

Collateralized mortgage obligations are bonds based on pools of home mortgages arranged to minimize the impact of loan prepayments on investment returns. Special classes of CMO bonds, such as companion bonds and PACs, either increase or decrease the prepayment risk—and the risk premium—for investors. While CMO bonds tend to pay lower yields than other pass-through securities, they still tend to outperform other kinds of low-risk debt securities such as US Treasury bonds.