Sequential Pay CMO

AAA

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.

INVESTOPEDIA EXPLAINS '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. Contraction Risk

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

    The risk of a security's expected maturity lengthening in duration ...
  5. Fannie Mae - Federal National Mortgage ...

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

    A type of asset-backed security that is secured by a mortgage ...
Related Articles
  1. Profit From Mortgage Debt With MBS
    Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

  2. Asset Allocation In A Bond Portfolio
    Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

  3. What is a Ginnie Mae security?
    Retirement

    What is a Ginnie Mae security?

  4. What is a tranche?
    Investing

    What is a tranche?

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center