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Types of Bonds

Minimum Investments, Transaction Costs, and Liquidity

The minimum investment for a CMO varies according to the structure of the offering, but most tranches sold to individual investors require a minimum investment of $1,000. CMO investments are also offered in the form of mutual funds or unit trusts which typically have $1,000 investment minimums.

A national network of mortgage securities dealers sells, trades, and makes markets in CMOs. These transactions are executed over-the-counter, directly from dealer to dealer, rather than through an exchange.

CMOs are bought and sold between dealers and investors like other debt instruments. Dealers trade the securities at a net cost which includes their own spread or profit on the transaction. Spreads on CMO transactions may be wider than spreads on Treasury security transactions, because Treasury securities have a broader and deeper secondary market and are therefore more liquid.

Although there is a sizable and active secondary market for many types of CMOs, the degree of liquidity can vary widely. Investors should remember that if they sell their CMOs rather than waiting for the final principal payment, the securities may be worth more or less than their original face value.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.