structured finance and collateralized debt obligations pdf

Structured Finance And Collateralized Debt Obligations Pdf

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Introduction to Collateralized Debt Obligations

Fixed Income 1 Reading Introduction to Asset-Backed Securities Subject 8. Collateralized Debt Obligations. Why should I choose AnalystNotes? AnalystNotes specializes in helping candidates pass.

Find out more. Subject 8. CDOs are assigned different risk classes, or tranches. It receives any remaining interest that is received from the collateral but not paid to the senior and mezzanine tranches. Problem: The majority of investors are paid a floating rate, whereas the underlying pool bonds pay a fixed rate.

If rates rise, the collateral manager can get burned. This is because the manager could find itself having to pay out an increasingly higher rate to tranche holders while its source of funds - interest on the underlying bonds - is fixed.

Solution: The manager must protect against rising rates. Entering a swap as the fixed payer variable receiver solves the problem, as this position provides positive cash flow when interest rates rise.

The collateral consists of bonds that all mature in five years. The coupon rate of these bonds is the five-year T-bond rate plus basis points. Assume that there is no default or asset management fee. All payments are made annually each year for simplicity. Cash CDOs Cash CDOs involve a portfolio of cash assets, such as loans, corporate bonds, asset-backed securities or mortgage-backed securities.

The risk of loss on the assets is divided among tranches in reverse order of seniority. Motivation - Arbitrage vs. Balance Sheet Arbitrage transactions attempt to capture for equity investors the spread between the relatively high yielding assets and the lower yielding liabilities represented by the rated bonds. The majority of CDOs are arbitrage-motivated. Balance sheet transactions, by contrast, are primarily motivated by the issuing institutions' desire to remove loans and other assets from their balance sheets, to reduce their regulatory capital requirements and improve their return on risk capital.

A bank may wish to offload credit risk in order to reduce its balance sheet's credit risk. Learning Outcome Statements i. LOS Quiz. Subject marked as complete. Subject marked as incomplete. Subject bookmarked for review later on your dashboard. Bookmark removed from your dashboard.

Download study notes in a PDF file immediately. Over 5, practice questions that cover the entire CFA curriculum. Global CFA ranking: Know where you stand at all times vs. Why wait? Everything you need to pass your exam is included.

Join now and your account will be upgraded immediately! Click here for details. Register a user account to print out study notes and all practice questions. My Flashcard:. Or does the sr class get paid some predetermined lesser rate that is pegged to the reference asset in return for taking on the lesser amount of credit risk?

I think I get everything except that. I think I am missing something. Problem solved. It's crazy guest CFAi book on Pg. I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work! My Own Flashcard No flashcard found. Add a private flashcard for the subject. So the sr class of the synthetic cdo gets a periodic payment that is a part of the swap premium even though the swap transaction was with the jr class?

I believe US financial system is capable of doing any sorts of complicated It's crazy. CFAi book on Pg.

Collateralized Debt Obligations

The structured finance market experienced phenomenal growth and innovation during the past decade. However, recent turmoil in the credit markets has raised doubts about the future viability of some products that rely primarily on the securitization process to derive value. Significant concerns have been raised about the lack of transparency of some securitization products. In this paper we review the availability of information about some of these complex products. Our review supports the conclusion that lack of transparency of these products is a significant problem. The paper contains a number of recommendations that we believe policymakers should consider to improve the transparency of these products.

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Collateralized Debt Obligation and its impact to the financial crisis

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