Collateralized Debt Obligations (CDOs)

What this video covers

• What a Collateralized Debt Obligation (CDO) actually is: a structured security backed by a diverse pool of debt including corporate bonds, loans, Mortgage-Backed Securities (MBS), and Asset-Backed Securities (ABS)
• The senior, mezzanine, and equity tranche hierarchy, and how priority of claim maps to risk and yield
• Why the equity tranche is the riskiest slice despite its name, absorbing losses first and often carrying no credit rating
• How losses flow through a CDO waterfall, with the equity tranche taking the first hit and the senior tranche only impacted if the entire pool collapses
• The core CMO vs CDO distinction: CMOs redistribute prepayment (timing) risk, while CDOs redistribute credit (default) risk
• Why a CDO can hold MBS as part of its collateral pool, but a CMO is limited to mortgage collateral only
• The senior-tranche trap: highest priority means lowest yield, because safety costs you return