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On the market is
a recently introduced mortgage-backed security called the collateralized
mortgage obligation (CMO). This security was created to relieve investors of
prepayment uncertainties that arise when homeowners refinance their mortgages.
Mortgage pool payments are divided into sections called tranches (French
for "slices") of principal and interest payments. Individuals invest in these
tranches based on their desired maturities. This way, CMOs pay interest to all
their investors, but principal payments are paid out in the order of maturity.
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