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Meaning / Definition of

Fixed Annuity

Categories: Insurance, Legal, ,

A fixed annuity is a contract that allows you to accumulate earnings at a fixed rate during a build-up period. You pay the required premium, either in a lump sum or in installments. The insurance company invests its assets, including your premium, so it will be able to pay the rate of return that it has promised to pay.At a time you select, usually after you turn 59 1/2, you can choose to convert your account value to retirement income. Among the alternatives is receiving a fixed amount of income in regular payments for your lifetime or the lifetimes of yourself and a joint annuitant. That's called annuitization. Or, you may select some other payout method.The contract issuer assumes the risk that you could outlive your life expectancy and therefore collect income over a longer period than it anticipated. You take the risk that the insurance company will be able to meet its obligations to pay.Some variable annuities offer a fixed rate account with a guarantee of principal, such as an interest account.

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Definition / Meaning of

Collateralized Mortgage Obligation (CMO)

Categories: Finance,

CMOs are fixed-income investments backed by mortgages or pools of mortgages. A conventional mortgage-backed security has a single interest rate and maturity date. In contrast, the pool of mortgages in a CMO is divided into four tranches, each with a different interest rate and term. Owners of the first three tranches receive regular interest payments and principal is repaid to reflect the order in which the tranches mature. The fourth tranche is usually a deep-discount zero coupon bond on which interest accrues until maturity, when the full face value is repaid. CMOs usually involve high-quality mortgages or those guaranteed by the government. Their yield may be lower than those of other mortgage-backed investments.However, the way in which they are repaid makes them especially attractive to institutional investors including insurance companies and pension funds. The risk, as with all mortgage-backed securities, is that a change in interest rates can affect the rate of repayment and the market value of the CMO.

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