Introduction to CDOs
The video provides a detailed introduction to a collateralized debt obligation (CDO). He first reviews the structure of a CDO; investors will fund a special purpose entity, which in turn, will purchase mortgage backed securities which are backed by mortgages taken by home owners.
He then moves on to discuss the different classes of investors in the SPE which are willing to take on different levels of risk. These classes are referred to tranches and have different rates of return and different risk characteristics in the even of a default of the special purpose entity. He walks through an example which illustrates how the different tranches are paid out in the event of a default.
This CDO structure can be leveraged to use any type of security, not just MBS ones. Asset backed securities backed with credit card debt or student loans and even a companies accounts receivables are other types of debt instruments which can be sold off to investors as well.
He then moves on to discuss the different classes of investors in the SPE which are willing to take on different levels of risk. These classes are referred to tranches and have different rates of return and different risk characteristics in the even of a default of the special purpose entity. He walks through an example which illustrates how the different tranches are paid out in the event of a default.
This CDO structure can be leveraged to use any type of security, not just MBS ones. Asset backed securities backed with credit card debt or student loans and even a companies accounts receivables are other types of debt instruments which can be sold off to investors as well.
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