Collateral Debt Obligations

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

cdo

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