Abstract
This chapter describes collateralized debt obligations (CDOs). CDO is a generic term used for two distinct products—balance sheet transactions and arbitrage transactions. Balance sheet CDOs are structured securities that are usually backed with bank-originated, investment-grade commercial and corporate loans. Arbitrage and balance sheet CDOs generally have a similar structure. The CDO asset class has similarities in its fundamental structure with other securities in the asset-backed security (ABS) market. The arbitrage CDO market can be broken down into two main asset types—cash flow CDOs and market value CDOs. Synthetic CDOs originated for balance sheet purposes and are intended to reduce regulatory capital requirements. The chapter concludes with a discussion on credit derivatives, which include a range of instruments designed to transfer credit risk without requiring the sale or purchase of bonds or loans. The main credit derivative instruments are credit-default swap, total-return swaps, and credit-linked notes.
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