CDO

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.