Colateralized securities

COLLATERALIZED SECURITIES

Collateralized securities are all very much the same investment by concept the only difference is that the underlying collateral changes. Of course, as it does the name of the investment changes – Collateralized ___ Obligation.

Underlying collateral Name
Mortgages CMO
Investment Grade Bonds CBO
High Yield Bonds (Debt) CDO
Other Assets (credit card, leases, etc) CIO
Bank Loans CLO


In concept they are very simple. An entity is formed (LLC), that entity takes in some equity and issues debt (C__O’s). With the equity and proceeds it buys the underlying asset of mortgages or bonds or loans or whatever. Since the issued bonds are overcapitalized – there is the equity and a small tranche of subordinated bonds issued, they are rated AAA b...