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A class of a Collateralized Mortgage Obligation (CMO) whose principal is paid off first when the underlying mortgages are prepaid due to falling interest rates. When interest rates rise, there will be lower prepayments of the principal; companion bonds therefore absorb most of the prepayment risk of a CMO.

Copyright © 2005, Campbell R. Harvey. All Worldwide Rights Reserved. Do not reproduce without explicit permission.

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Companion bonds

collaterized

collaterized mortgage obligation

mortgage

mortgage debt

CMO

prepayment risk