A CMO (collateralized mortgage obligation) is a structured product that is backed and collateralized by a pool of mortgage loans and similar debt arrangements. It is a type of mortgage-backed security (MBS) that consists of a collection of mortgages packaged together and sold to investors (in which case, the investors/ lenders or holders of the securities) as one unit. These underlying assets of the mortgage loans (e.g., mortgaged assets) provide a collateral if the loan ends up in default (in case the borrower runs into default on payment/ repayment). The proceeds collected from the pool of mortgages will be used to service the debt embodied in the securities held by the investors (the lenders).

In financial application, the importance of CMOs draws on the following:

• The CMO converts an instrument, that provides long-term monthly payments, into bond-like securities that provide semi-annual payments and may come with various maturities (short, mid, and long).
• Credit quality- the packaged securities carry high investment grade credit rating thanks to the high quality of the underlying collateral as well as the protective overall structure.
• The multiple-maturity slices makes the cash flows for a specific maturity class more certain and established. And since shorter maturity tranches assume the initial load of excess principal repayments, longer maturity classes are usually left with limited call protection.
• CMOs allow investors to make reasonably higher yield premiums over specific risk-free securities and other risky securities with higher premiums.
• CMOs are basically free from default risk (event risk): situations or events that contribute to price fluctuations in the financial sector.
• CMO structures provide investors with a broader range of investment maturities that may suit their requirements in terms of time horizon. For example, insurance companies tend to acquire mid-term tranches (that suit specific life insurance products)..