Collateralized Debt Obligations (CDOs): CNBC Explains

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

From this video you’ll understand:

  • How CDOs are created
  • Investor and investment bank rationale behind CDOs
  • Theoretically how CDO tranches offer a variety of risk