Please read the information below to get a better understanding of what collateral debt obligations are.
CDO’s allows investors to select the desired level of risk. BUT – Proper risk computation is virtually impossible since few if any besides (maybe) the issuer understands what is in the CDO.
The issuer of the collateral debt obligation does the following:
- Bundles various debt obligations (e.g. mortgages)
- Slices them in tranches (most senior to most junior)
- Collects principal and interest payments and passes them on to CDO holders
- Most senior tranches are paid first… lowest risk and lowest interest payment – highest rating
- Most junior tranches are paid last if enough payments are collected – highest risk and highest interest – junk status