As their name suggests, commercial mortgage-backed securities (CMBS) are closely related to the more popular Residential Mortgage-Backed Securities. Naturally enough, CMBS are mortgage-backed securities that are backed by commercial mortgages. In practice, CMBS tend to be less straightforward than RMBS in part because RMBS tend to be based on large numbers of almost identical mortgages that behave in a very predictable way. CMBS tend to be based on less homogenous assets and so behave in a less predictable way.
Many single commercial mortgage loans of varying sizes, property types and locations are pooled and transferred to a trust. CMBS are often issued by the trust in separate tranches with different risk weightings. Interest on these bonds can be a fixed rate or a floating rate. The separate tranches may vary in yield, duration and payment priority. Rating agencies then assign credit ratings to the various tranches including an unrated class which is subordinate to the lowest rated bond class.