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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 available 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?
  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?
  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 CMO change if interest rates move up (or down) by 100, 200, or 300 basis points (100 basis points = 1%)?
    1. If interest rates rise:
      • Yield
      • Average life
    2. 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?
  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
    • No

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.