When an investor purchases a CMO, he or she purchases some class or tranche of the security whose risk depends on the maturity structure of the mortgages backing it. These tranches are usually designated as A, B, C, etc. and increase in degree of risk as the letters ascend.
To illustrate, Class A of a CMO would be the highest risk tranche offering the highest rate of return based on mortgages that still have a long term until full repayment by the borrowers. For this reason, they are exposed not only to interest rate and default risk but also to prepayment risk, the risk that borrowers will pay off the mortgage in advance of the mortgage term (e.g. 15 years, 30 years, etc.). Class A in this CMO will be the first of all of the tranches to absorb losses from borrowers' failure to make payments. Class A will, however, also be the first to receive money from prepayments.
By contrast, Class C of a CMO would carry the least risk for the holder, but offer a much lower rate of return. This is because the mortgages backing it are likely approaching their full repayment, meaning that the holder is solely receiving interest, and perhaps some principal payments from the remainder of the mortgage term. For this reason, Class C CMOs will receive little or no returns from prepayments.