Per CFA book of Fixed Income -
(1) Collateralized mortgage obligations (CMOs) are created from MPS which use amortizing mortgage loans as the collateral. A CMO issue has different tranches, each of which has a different type of claim to the cash flows from the pool of mortgages.
(2) A collateralized debt obligation (CDO) is a debt instrument where the collateral for the promise to pay is underlying pool of other debt obligations and even other CDOs. These underlying debt obligations can be business loans, mortgages, etc. CDO also creates tranches based on the seniority of the claims to the cash flows of the underlying assets.
Neither the textbook nor the notes provide any details to illustrate the relationship between CMOs and CDOs. And they sound very similar to me… I was wondering _ whether we can say _ that _ CMOs are a type of CDOs _.
If I was wrong, can you please let me know what are the differences/relationships between CMOs and CDOs? Thank you!
