Valuation and Analysis of Collateralized Mortgage Obligations

John J. McConnell and Manoj Singh
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John J. McConnell: Krannert Graduate School, Purdue University, West Lafayette, Indiana 47907
Manoj Singh: Boston College, Chestnut Hill, Massachusetts 02167

Management Science, 1993, vol. 39, issue 6, 692-709

Abstract: This study develops a model for the valuation of Collateralized Mortgage Obligations (CMOs). The model is based on a two-factor model of the term structure of interest rates and embeds an empirically estimated mortgage prepayment function. The model is used to analyze various CMO tranches, including standard sequential pay fixed-rate tranches, Planned Amortization Class (PAC) tranches, Targeted Amortization Class (TAC) tranches, floating-rate tranches, Interest Only (IO) and Principal Only (PO) tranches, Z-bonds and Residuals. The results of this analysis illustrate the sensitivity of the various tranches to differences in CMO structure, changes in interest rates, the characteristics of the underlying collateral, and mortgage prepayments.

Keywords: collateralized mortgage obligations; CMOs; mortgage-backed securities; tranche (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:39:y:1993:i:6:p:692-709

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