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Fixed Income Markets and Their Derivatives, 3rd Edition by Suresh Sundaresan

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Chapter 19

Structured credit productsCollateralized debt obligations

Chapter Summary

Collateralized debt obligations (CDOs) in which the underlying collateral can be portfolios of loans, corporate bonds, asset-backed securities, mortgage pools, and so on are traded. On the economic strengths of the underlying pools, various bonds are issued with different subordination and seniority in terms of their exposure to default risk and the recovery risk of the underlying pool of collateral. Such bonds are referred to as equity, mezzanine, senior, and super-senior tranches. This chapter describes how CDOs are created and outlines their valuation procedure. The role of the CDX market and its impact on tranched trading of credit risk are discussed.

Structured ...

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