would receive any prepayments before the second group would, and so on. Thus the first group of bonds would be expected to pay off sooner, but would also have a lower interest rate. Thus a 30-year mortgage is transformed into bonds of various lengths suitable for various investors with various goals. A group of mortgages could create four different classes of bonds. Any losses would go against the first group, before going against the second group, etc. The first group would have the highest interest rate, while the second would have slightly less, etc. Thus an investor could choose the bond that is right for the risk they want to take (i.e. a conservative bond for an insurance company, a speculative bond for a hedge fund). A group of mortgages could be split into principal-only and interest-only bonds. The "principal-only" bonds would sell at a discount, and would thus be zero coupon bonds (e.g., bonds that you buy for $800 each and which mature at $1,000, without paying any cash interest). These bonds would satisfy investors who are worried that mortgage prepayments would force them to re-invest their money at the exact moment interest rates are lower; countering this, principal only investors in such a scenario would also be getting their money earlier rather than later, which equates to a higher return on their zero-coupon investment. The "interest-only" bonds would include only the interest payments of the underlying pool of loans. These kinds of bonds would dramatically change in value based on interest rate movements, e.g., prepayments mean less interest payments, but higher interest rates and lower prepayments means these bonds pay more, and for a longer time. These characteristics allow investors to choose between interest-only (IO) or principal-only (PO) bonds to better manage their sensitivity to interest rates, and can be used to manage and offset the interest rate-related price changes in other investments. Whenever a group of mortgages is split into different classes of bonds, the risk does not disappear. Rather, it is reallocated among the different classes. Some classes receive less risk of a particular type; other classes more risk of that type. How much the risk is reduced or increased for each class depends on how the classes are structured. Credit protection CMOs are most often backed by mortgage loans, which are originated by thrifts (savings and loans), mortgage companies, and the consumer lending units of