Collateralized Debt Obligations (CDOs): CNBC Explains

Collateralized Debt Obligations (CDOs): CNBC Explains

Among the derivative securities at the epicenter of the financial crisis, one of the major culprits blamed for financial chaos were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset, but in this case it is a mortgage-backed security, which is another derivative. How are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy 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