Cdo Basic Structure
CDO
• Introduction to CDOs
• Types of CDOs
• Transaction Structure & Mechanics
• Evaluation of CDOs
• Risk associated with Investing in CDOs
• Fair spread estimation with Monte Carlo Simulation
• CASE STUDY: HVB ASSET MANAGEMENT ASIA (HVBAM)
• CDO in Subprime Mortgage Crisis
Introduction to Collateralized Debt Obligations (CDOs)
A CDO is an asset-backed security whose underlying collateral is typically a portfolio of bonds (corporate or sovereign) or bank loans. A CDO cash-flow structure allocates interest income and principal repayments from a collateral pool of different debt instruments to a prioritized collection of CDO securities, called as tranches. While there are many variations, a standard prioritization scheme is simple subordination: Senior CDO notes are paid before mezzanine and lower-subordinated notes are paid, with any residual cash flow paid to an equity piece.
A cash-flow CDO is for which the collateral portfolio is not subjected to active trading by the CDO manager, implying that the uncertainty regarding interest and principal payments to the CDO tranches is determined mainly by the number and timing of defaults of the collateral securities.
A market-value CDO is one in which the CDO tranches receive payments based essentially on the mark-to-market returns of the collateral pool, as determined in large part by the trading performance of the CDO manager.
The trustee of the CDO is responsible for monitoring the contractual provisions of the CDO.
Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. Senior and mezzanine tranches are typically rated, with the
• Introduction to CDOs
• Types of CDOs
• Transaction Structure & Mechanics
• Evaluation of CDOs
• Risk associated with Investing in CDOs
• Fair spread estimation with Monte Carlo Simulation
• CASE STUDY: HVB ASSET MANAGEMENT ASIA (HVBAM)
• CDO in Subprime Mortgage Crisis
Introduction to Collateralized Debt Obligations (CDOs)
A CDO is an asset-backed security whose underlying collateral is typically a portfolio of bonds (corporate or sovereign) or bank loans. A CDO cash-flow structure allocates interest income and principal repayments from a collateral pool of different debt instruments to a prioritized collection of CDO securities, called as tranches. While there are many variations, a standard prioritization scheme is simple subordination: Senior CDO notes are paid before mezzanine and lower-subordinated notes are paid, with any residual cash flow paid to an equity piece.
A cash-flow CDO is for which the collateral portfolio is not subjected to active trading by the CDO manager, implying that the uncertainty regarding interest and principal payments to the CDO tranches is determined mainly by the number and timing of defaults of the collateral securities.
A market-value CDO is one in which the CDO tranches receive payments based essentially on the mark-to-market returns of the collateral pool, as determined in large part by the trading performance of the CDO manager.
The trustee of the CDO is responsible for monitoring the contractual provisions of the CDO.
Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. Senior and mezzanine tranches are typically rated, with the