These bonds would have a 30-year amortization, and an interest rate of 6.00% for example (with the remaining 0.50% going to the servicing company to send out the monthly bills and perform servicing work). However, this format of bond has various problems for various investors Even though the mortgage is 30 years, the borrower could theoretically pay off the loan earlier than 30 years, and will usually do so when rates have gone down, forcing the investor to have to reinvest his money at lower interest rates, something he may have not planned for. This is known as prepayment risk. A 30-year time frame is a long time for an investor's money to be locked away. Only a small percentage of investors would be interested in locking away their money for this long. Even if the average home owner refinanced their loan every 10 years, meaning that the average bond would only last 10 years, there is a risk that the borrowers would not refinance, such as during an extending high interest rate period, this is known as extension risk. In addition, the longer time frame of a bond, the more the price moves up and down with the changes of interest rates, causing a greater potential penalty or bonus for an investor selling his bonds early. This is known as interest rate risk. Most normal bonds can be thought of as "interest only loans", where the borrower borrows a fixed amount and then pays interest only before returning the principal at the end of a period. On a normal mortgage, interest and principal are paid each month, causing the amount of interest earned to decrease. This is undesirable to many investors because they are forced to reinvest the principal. This is known as reinvestment risk. On loans not guaranteed by the quasi-governmental agencies Fannie Mae or Freddie Mac, certain investors may not agree with the risk reward tradeoff of the interest rate earned versus the potential loss of principal due to the borrower not paying. The latter event is known as default risk. Salomon Brothers and First Boston created the CMO concept to address these issues. A CMO is essentially a way to create many different kinds of bonds from the same mortgage loan so as to please many different kinds of investors. For example: A group of mortgages could create four different classes of bonds. The first group