Types of Bonds
Collateralised Bonds-Securitisation, Structured Products and Covered Bonds
Collateralised Debt Obligations or CDOs
A collateralised debt obligation (CDO) is a type of securitisation, whereby a diversified pool of loans or securities is packaged into various tranches backed by the cash flows of the asset pool. CDOs may pay a fixed or floating coupon, paid semi annually, quarterly or monthly with most senior debt being rated AAA to A and subordinate debt BBB to B and/or an unrated “first loss tranche”. There are many types of CDOs. Some are backed by a diversified pool of a single asset class (such as mortgages, loans to small and medium sized companies, large companies) or a mixture of asset classes.
Due to their complexities, some CDOs can be relatively volatile in terms of ratings and their market value. For example, CDOs backed by the tranches of other securitisations particularly subprime loans, have been very volatile and many have been downgraded. Other CDOs, such as those backed by corporate loans, have been relatively stable and continue to offer high yields with reasonable stability.