Collateralised
Debt Obligation - a
Debt Security backed by a pool of
Bonds,
Loans and other
Receivables. CDOs do not specialize in one type of
Debt but are often non-
Mortgage Loans or
Bonds. The CDO can be cash flow or synthetic (i.e. the credit value is derived from a
Debt that the
SPV does not actually own).
CDOs can be complex instruments, and there are a number of risks associated with them. These risks include:
- Credit risk: The risk that the borrowers underlying the CDO will default on their loans.
- Interest rate risk: The risk that interest rates will rise, which will reduce the value of the CDO.
- Liquidity risk: The risk that it will be difficult to sell the CDO.
Despite the risks associated with them, CDOs can be a useful tool for transferring risk. However, investors should carefully consider the risks before investing in CDOs.