Sequential Pay CMO

DEFINITION of 'Sequential Pay CMO'

A type of collateralized mortgage obligation (CMO) in which there are several tranches. Each tranche's holder receives interest payments as long as the tranche's principal amount has not been completely paid off. The senior tranche receives all initial principal payments until it is completely paid off, after which the next most senior tranche receives all the principle payments, and so on.

BREAKING DOWN 'Sequential Pay CMO'

Investors with shorter investment horizons, such as commercial banks, can purchase bonds from senior tranches in order to protect their investments from extension risk. Investors with longer investment horizons, such as pension funds, can protect their investments from contraction risks by purchasing bonds from more junior tranches.

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Calamity Call

    A call feature of a Collateralized Mortgage Obligation (CMO) ...
  3. Fannie Mae - Federal National Mortgage ...

    A government-sponsored enterprise (GSE) that was created in 1938 ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  6. Extension Risk

    The risk of a security's expected maturity lengthening in duration ...
Related Articles
  1. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  2. Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

    An investor's fixed-income portfolio can easily beat the average bond fund. Learn how and why!
  3. Mutual Funds & ETFs

    VXX: An ETN Performance Case Study

    Examine the five-year performance of the volatility ETF VXX. Break down the performance by analyzing monthly and daily average returns.
  4. Investing News

    Bridgewater Associates: Investment Manager Highlight

    Discover the investment methodologies of Ray Dalio's Bridgewater Associates, the world's largest and most profitable hedge fund.
  5. Investing News

    AQR Capital Management: Investment Manager Highlight

    Discover the investment strategies and secrets of hedge fund powerhouse AQR Capital Management LLC in the alternative investment space.
  6. Investing News

    Performance Review - U.S. Fixed Income in 2015

    Review the performance of the U.S. fixed-income securities in 2015, from the relatively strong U.S. municipal bond market to the calamitous high-yield space.
  7. Bonds & Fixed Income

    Do Long-Term Bonds Have A Greater Interest Rate Risk Than Short-Term Bonds?

    The answer is yes, and there are two main reasons why.
  8. Bonds & Fixed Income

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  9. Products and Investments

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  10. Investing News

    Natixis Global Asset Management: Investment Manager Highlight (NTXFY)

    Read about the investment operations of Natixis Global Asset Management, a multiaffiliate manager with $870 billion in worldwide assets under management.
RELATED FAQS
  1. What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security ... Read Answer >>
  2. What is a Ginnie Mae security?

    A Ginnie Mae, or Government National Mortgage Association security, functions similarly to the process of lending someone ... Read Answer >>
  3. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
  4. Besides a savings account, where is the safest place to keep my money?

    Savings accounts are safe because investors' deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) ... Read Answer >>
  5. Should I offer alternative investments to my employees?

    Learn the pros and cons of employer-recommended alternative investments and why risky alternatives, such as hedge funds, ... Read Answer >>
  6. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center