Final answer:
Mortgage pass-through securities represent ownership in a pool of mortgages, while collateralized mortgage obligations (CMOs) are more complex and offer different payment priorities based on tranches. Stripped mortgage-backed securities separate the principal and interest payments and are sold as separate instruments.
Step-by-step explanation:
Mortgage Pass-Through Securities: These are the most basic type of mortgage-backed securities (MBS). They represent ownership in a pool of mortgages, and the cash flows from the mortgage payments are passed through directly to the investors. The investors receive a share of the monthly principal and interest payments made by the borrowers.
Collateralized Mortgage Obligations (CMOs): CMOs are more complex than pass-through securities. They are structured with different classes, called tranches, which have different payment priorities and risk levels. Each tranche receives a share of the principal and interest payments according to a predetermined order, allowing investors to choose the level of risk and return they desire.
Stripped Mortgage-Backed Securities: These securities are created by separating the principal and interest payments of a mortgage. The principal-only (PO) and interest-only (IO) securities are sold as separate instruments. Investors can choose to invest in PO securities, which pay the principal component of the mortgage payment, or IO securities, which pay the interest component of the mortgage payment.