Collateralised Debt Obligations

These are a type of asset backed security
CDOs are constructed from a portfolio of fixed income assets
These assets are then divided into different tranches.

  • Senior, rated AAA

  • Mezzanine, rated AA to BB

  • Equity, unrated

Losses are applied in reverse order of seniority and so junior tranches offer higher coupons to compensate for the higher risk.

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