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What are collateralised debt obligations?

A collateralised debt obligation (CDO)is a structured asset-backed security which groups together assets that make money and repositions this asset group into distinct tranches that can then be bought by investors. The pooled assets then become debt obligations, serving as collateral for the CDO.

Where have you heard about collateralised debt obligations?

CDOs were considered a specialist product until the US housing boom of 2003, when those associated with it focused their attention onto non-prime mortgage backed securities as a new collateral fount. CDOs are generally thought to have contributed to the 2007 financial crisis.

What you need to know about collateralised debt obligations..

The first CDOs were developed and initiated by the bank Drexel Burnham Lambert in 1987. Different securities firms then launched CDOs for more obviously accessible income pools such as student loans.

Nowadays, up to five parties can have involvement in the construction of a CDO:

  • Ratings agencies who will assess the CDO and lay the credit rating.
  • CDO mangers who oversee the portfolios.
  • Financial guarantors who reimburse investors for possible losses on tranches in exchange for optimum payments.
  • Securities firms who approve collateral selection.
  • Investors.

Find out more about collateralised debt obligations...

To learn more about collateralised debt obligation, see our page on mortgage backed securities.

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