Collateralized Mortgage Obligations QuestionsCollateralized Mortgage Obligations questions you should ask before investing in CMOs.
Before investing in a CMO, you should be able to answer the following questions with the help of your investment professional:
1. Is the CMO
______ agency-issued,
______ or private label?
2. If it is a private-label CMO, what is its credit rating?
________________________
3. Do I have a prospectus, prospectus supplement, or offering circular for this CMO?
_______ Yes _______ No
_______ If not, can I obtain it from the broker-dealer or from the issuer?
4. Am I buying this CMO
_______ at original issue, or
_______ in the secondary market?
5. If it is trading in the secondary market, how have the prepayments compared to the assumptions?
_______ Faster
_______ Slower
________ In line with assumptions
6. If it is trading in the secondary market, how much of the underlying principal remains?
____________________________
7. What is the tranche’s:
Estimated average life? ____________ years
Estimated final maturity? ___________ (date)
Estimated yield? _______ %
8. How do the estimated average life and final maturity compare to my investment time frames? ____________________________
9. How does the estimated yield compare to comparable Treasury securities adjusted for state and local income taxes?
Treasury yield __________________
CMO after-tax yield ______________ %
10. What is the estimated first principal payment date?
_____________________ (date)
11. Is the tranche a
Sequential pay, ______ PAC, ______ TAC, or ______ Companion tranche?
12. If it is a PAC or TAC tranche, does it function as a support to Type I PACs (such as Type II and Type III PACs)?
_____ Yes _____ No
13. If it is a PAC or TAC tranche, what prepayment assumptions are the scheduled principal payments based on?
________________ % PSA
14. When can I expect my principal to be returned if the prepayment assumptions are:
______ Faster than expected?
______ On target?
______ Slower than expected?
15. How will the estimated yield and average life of this change if interest rates move up (or down) by 100, 200, or 300 basis points (100 basis points = 1%)?
a. If interest rates rise:
_______ Yield _______ Average life
b. If interest rates fall:
_______ Yield _______ Average life
16. Am I paying a price that reflects
________ a premium over face value?
_______ a discount from face value?
_______ par value?
17. What is my first expected payment date?
________________________ (date)
18. Is there an active secondary market in this security if I need to sell this CMO before its final principal payment?
_____ Yes _____ No
19. Given my investment objectives (such as retirement, education, or income and growth), is this
CMO appropriate for my account?
_____ Yes _____ No
20. Is there any non-credit related risk of losing some or all of my principal investment in this CMO?
_____ Yes _____ NoCopyright 2006. The Bond Market Association. Reprinted with permission.  The best way to find out about what we do is to make an appointment with one of our investment counselors.
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