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Type List | Item List

Instrument Item: CDO- Collateralized Debt Obligations



Acronym or Abbreviation CDO
Alias or Synonym
Key Words
Description (HTML) The collateralized debt obligation (CDO) came to life in the late 1980’s and shares many of the characteristics of a CMO: loans are pooled together, repacked into new securities, investors are paid interest and principal as income and the pools are sliced into tranches with varying degrees of risk and maturity. A CDO falls under the category known as an asset backed security (ABS) and like an MBS, uses the underlying loans as the asset or collateral. The development of the CDO filled a void and provided a valid way for lending institutions to essentially move debt into investments through securitization, the same way mortgages were securitized into CMOs. Similar to CMOs issued by REMICs, CDOs use special purpose entities (SPE) to securitize their loans, service them and match investors with investment securities. The beauty of a CDO is that it can hold just about any income producing debt like credit cards, automobile loans, student loans, aircraft loans and corporate debt. Like CMOs, the slicing up of the loan pieces is structured from senior to junior with some oversight from rating agencies who assign grade ratings just like a single issue bond, e.g. AAA, AA+, AA, etc.

Each CDO has a balance sheet just like any company would have. The assets are comprised of the income producing components like loans, bonds, etc. Each bond issued on the left is tied to a specific pool of assets on the right. The bonds are then rated by third parties based on the seniority of their claims to the pool and the perceived quality of the underlying assets. In theory, bonds of lower quality ratings and seniority would command higher rates of return by investors.

Source Description Investopedia
Source URL http://www.investopedia.com/articles/investing/111213/cmo-vs-cdo-same-outside-different-inside.asp
Document No document attached...
Lifecycle - Exist Start Date 1989-01-01
Lifecycle - Exist End Date UNKNOWN
Item Quality Status (Item Quality Status) Acceptable
Updated by webea.09
Updated on 2014-05-13 15:54:39
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Asset Backed SecurityInstrument Asset Backed Security