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Inverse Floater CMO

A collateralized mortgage obligation (CMO) that is structured as inverse floater tranches. The CMO will earn interest at rates that relate adversely to a given floating rate index. It offers a high return in a falling interest rate environment. Inverse floater CMOs are, by nature, highly volatile and expose their investors to high levels of risk. As interest rates move up, principal payments to the investor may drop. The decrease in repayment of CMO principal extends the maturity date and hence is known as extension risk.


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