Page 86 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

LOS 53.i: Describe collateralized debt Session Unit 15:
obligations, including their cash flows and 53. Introduction To Asset-Backed Securities
risks., p.91

A collateralized debt obligation (CDO) is a structured security issued by an SPE for which the collateral
is a pool of debt obligations. When the collateral securities are corporate and emerging market debt,

they are called collateralized bond obligations (CBO).

Collateralized loan obligations (CLO) are supported by a portfolio of leveraged bank loans. Unlike the

ABS we have discussed, CDOs do not rely on interest payments from the collateral pool. CDOs have a
collateral manager who buys and sells securities in the collateral pool in order to generate the cash to
tanties
make the promised payments to investors.

Structured finance CDOs are those where the collateral is ABS, RMBS, other CDOs, and CMBS.

Synthetic CDOs are those where the collateral is a portfolio of credit default swaps on structured
securities.

CDOs issue three classes of bonds (tranches): senior bonds, mezzanine bonds, and subordinated bonds

(sometimes called the equity or residual tranche). The subordinated tranche has characteristics more
similar to those of equity investments than bond investments. In creating a CDO, the structure must be
able to offer an attractive return on the subordinated tranche, after accounting for the required yields

on the senior and mezzanine bond classes.