April 2008
Intermediate to advanced
543 pages
13h 50m
English
book
Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors
by GLENN M. SCHULTZ, FRANK J. FABOZZI, BRIAN P. LANCASTER
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CHAPTER 13
CDO Equity
Brian McManus
Senior CDO Analyst
Wachovia Capital Markets, LLC
Steven Todd, Ph.D.
CDO Analyst
Wachovia Capital Markets, LLC
Anik Ray
Associate CDO Analyst
Wachovia Capital Markets, LLC
Dave Preston, CFA
Associate CDO Analyst
Wachovia Capital Markets, LLC
The equity of a collateralized debt obligation (CDO) represents a residual claim on the cash flows from the assets collateralizing a CDO. By providing access to assets that investors cannot easily gain exposure to, CDOs deliver diversification benefits that expand the efficient frontier. Although CDO equity returns are closely linked to the performance of the underlying assets, returns will not be perfectly correlated due to structural provisions that affect the way collateral cash flows are distributed.
CDO equity investors can earn high dividend payments that are typically front-loaded. Moreover, compared with private equity and hedge fund investments, CDO equity offers greater transparency. Like the former, CDO equity is also risky and illiquid and investors could lose part of their original investment. We recommend investors thoroughly understand this product before investing.
We believe CDO equity investors should stress-test issues using vector analysis. By using vector analysis, investors can determine how equity will perform if defaults are front-loaded (worst case) or back-loaded (best case). Potential buyers often request CDO equity performance statistics, but these are not easily summarized due ...
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