A Collateralized Mortgage Obligation (CMO) is a type of mortgage-backed security where principal and interest payments from a pool of mortgages are redirected to different classes of bonds, known as tranches. Each tranche is a distinct "slice" of the CMO with its own specific investment characteristics. These include a unique coupon rate, a stated maturity, and a specific priority for receiving principal payments from the underlying mortgage pool. This structure allows investors to select a tranche that aligns with their specific risk tolerance and investment horizon, as different tranches carry different levels of prepayment and extension risk.

A: This describes yield to maturity, which is a measure of a bond's total return, not the definition of a tranche.

B: This describes the average life, which is an estimate of a tranche's principal repayment timeline, not the tranche itself.

D: This describes the underwriting process, which is the risk assessment of the underlying loans before they are securitized.

1. U.S. Securities and Exchange Commission (SEC). (2012). Investor Bulletin: Collateralized Mortgage Obligations. SEC.gov. In the section "How CMOs Work," the bulletin states, "CMOs are structured with a number of different classes of bonds, called tranches. Each tranche has a different maturity and risk."

2. Financial Industry Regulatory Authority (FINRA). (2015). Investor Alert: Collateralized Mortgage Obligations (CMOs) — Know the Risks Before You Buy. FINRA.org. The alert explains, "CMOs are structured in 'slices' or 'tranches,' with each tranche having its own set of rules for distributing the principal and interest payments from the underlying mortgage pool... Each tranche has a different coupon, a different maturity, and a different risk/return profile."

3. Fabozzi, F. J. (2001). The Handbook of Fixed Income Securities (6th ed.). McGraw-Hill. In Chapter 26, "Collateralized Mortgage Obligations," the text defines tranches as different bond classes created from the cash flows of the underlying mortgage collateral, each with its own set of rules and investment characteristics.