Collateralized Debt Obligations (CDOs)
Chapters in this video
What this video covers
- Why a collateralized debt obligation (CDO) pools diverse debt (corporate bonds, loans, mortgage-backed securities (MBS), asset-backed securities (ABS)) rather than mortgage-only collateral
- How credit losses flow upward through tranches: equity first, mezzanine second, senior last, and what claim priority means for each floor
- Why the equity tranche is the riskiest slice despite its name, and why it demands the highest potential yield
- How senior tranche safety translates to lowest yield and typically AAA rating, and where mezzanine sits in between
- The single most tested distinction: CDO tranches redistribute credit/default risk, while collateralized mortgage obligation (CMO) tranches redistribute prepayment risk
- Why a CDO containing MBS in its collateral pool is still a CDO, and the trap of calling anything with mortgages a CMO
- How to apply the flooding-building visual to any exam question asking loss-absorption order or risk-yield tradeoffs
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