8. Collateralized Debt Obligations
i. describe collateralized debt obligations, including their cash flows and risks.
What is a collateralized debt obligation (CDO)?
Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) with value and payments derived from a portfolio of fixed-income underlying assets.
What are the three differenty types of tranches for CDOs?
- A senior tranche: between 70% and 80% of the deal and receives a floating-rate payment
- Subordinated or mezzanine tranches: receive a fixed coupon rate
- Equity tranche: provides equity protection to other tranches.
What is a Cash CDO?
Cash CDOs involve a portfolio of cash assets, such as loans, corporate bonds, asset-backed securities or mortgage-backed securities.