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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTERTWENTY-NINESUPPORT BONDS WITH SCHEDULES IN AGENCY CMO DEALS

LINDA LOWELL

PrincipalOffStreet Research LLC

Collateralized mortgage obligations (CMOs) were first devised to meet two general objectives. The first was to make a better match between a wide range of investors’ maturity requirements and the expected cash flows from a pool of mortgages. The second was to redistribute prepayment risk to different classes at levels that many more investors would accept. The initial solution to the problem simply split the returning principal among a series of sequential-pay bonds. Subsequently, this structure has evolved into an array of reduced-risk CMO bond structures, the most heavily issued of which is the planned amortization class (PAC). PACs ...

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