|Author||Topic: CMO Clarification Question|
|Do individual investors buy into the separate tranches of a CMO? IE can I buy into tranche A? The explanations of the questions appear this is the case, but it is not specifically mentioned. Can anyone please confirm/deny?
CMOs however, are characterized by a senior/subordinate structure in reference to principal prepayments, and investors in CMOs do not face prepayment risk equally. When issued, CMOs are created in various classes, called "tranches," each of which has a prespecified seniority in accordance to principal repayments. For example, suppose XYZ Mortgage Corporation issues a CMO, and this CMO is comprised of three tranches - tranche A, B, and C. Principal prepayments are to be allocated first to tranche C, and are to continue within this tranche until it has been exhausted. Once the principal of tranche C has been completely repaid, principal prepayments are to be allocated toward tranche B, and are to continue until this tranche is exhausted. Finally, principal prepayments are then to be allocated to the remaining class, tranche A.