A collateralized bond obligation (CBO) is a type of structured finance security. It is created by pooling together a group of bonds and other debt instruments, and then dividing the resulting pool into tranches. The bonds in the pool serve as collateral for the CBO.
The CBO structure allows the issuer to sell different tranches of the security to investors with different risk profiles. For example, the issuer may sell a "junior" tranche to investors who are willing to take on more risk in exchange for a higher yield, and a "senior" tranche to investors who are looking for a lower-risk investment.
The bonds in the pool may be of different types, such as corporate bonds, government bonds, or mortgage-backed securities. The issuer typically uses financial engineering techniques to create a CBO that has a desired risk/return profile.
Collateralized bond obligations were first introduced in the 1980s, and became popular in the 1990s. They were used to finance a variety of investments, including leveraged buyouts and commercial real estate. The collapse of the subprime mortgage market in 2007 led to the default of many CBOs, and the ensuing financial crisis.
Is a CDO a swap?
A CDO is not a swap. A swap is a financial contract between two parties in which each party agrees to exchange cash flows on a specified date or series of dates. The cash flows are typically based on an underlying asset, such as a bond or a stock index.
What is the difference between CDS and CDO? A CDO is a collateralized debt obligation. That is, it is a security backed by a pool of assets, typically loans or bonds. The pool of assets is usually divided into tranches, with each tranche having a different risk profile. For example, the senior tranche may be composed of low-risk assets, while the junior tranche may be composed of high-risk assets.
A CDS is a credit default swap. In a CDS, one party agrees to pay the other party a stream of payments in exchange for protection against default on a specified security. The security can be a bond, a loan, or another type of asset.
Is a CMO a pass-through security? A CMO is a pass-through security in that it is a debt instrument that represents a pro-rata share of the underlying mortgage pool. The payments made on the underlying mortgages are passed through to the holders of the CMO in the form of periodic interest payments and eventual repayment of principal. CMOs are created through the process of securitization, which involves pooling together a large number of mortgages and selling them to investors in the form of a bond.
Are CDOs still being sold? Yes, CDOs are still being sold, but they are not as popular as they once were. The financial crisis of 2008 was caused in part by the collapse of the housing market, which led to the failure of many CDOs. As a result, investors are now much more cautious about investing in these products.
What does CDO stand for in slang? CDO stands for Collateralized Debt Obligation. A CDO is a type of investment vehicle that is backed by a pool of assets, typically loans or bonds. The assets are then divided into different tranches, or slices, which have different levels of risk and return.