A Primer On Collateralized Debt Obligation (CDOs)
a collateralized debt obligation or cdo is a structured financial product backed by a pool of loans. when a retail or commercial bank approves loans such as mortgages, auto loans or credit cards to individuals or businesses, these loans are then sold to an investment bank. the investment bank repackages these loans to form an investment product called the cdo which is then sold to investors. the principal and interest payments made on the loans are redirected to the investors in the pool. the promised repayment of the loans in the pool is the collateral that gives the cdo's value, hence the term collateralized. if the underlying loans go bad, the bank transfers much of the risk to the investor, which will typically be a large pension fund or hedge fund. as a result, banks slice the cdo into various risk levels or tranche. senior tranche are the safest, because they have the first claim on assets if some of the underlying loans default. junior tranche are riskier and therefore offer higher interest rates to attract investors. during the 1990's and early 2000's, most cdos were backed by ? loans which limited the risk of default and gave the instrument a reputation for stability. but, around 2003, the housing boom led a number of banks to use subprime mortgages as their main source of collateral. with the popularity of cdo skyrocketing, home lenders receive a steady stream of cash and as a result often extended credit to high risk borrowers. when the real estate market stalled and mortgage default started to rise, cdo issuers and their investors suffer the enormous losses. while cdos offer the possibility for attractive fixed returns, the fallout from the financial crisis has led to greater scrutiny regarding the loans that serve as their collateral.
- collateralized debt obligation（cdo）・・・債務担保証券→https://ja.wikipedia.org/wiki/Collateralized_Debt_Obligation