The paper "The Establishment of the Collateralized Debt Obligations" is an outstanding example of marketing coursework. A few years ago many of the local councils have purchased a set of financial instruments which they were considering as the safe investments in the shape of Collateralized Debt Obligations (CDOs), but in reality that investment was a risky transaction as the returns associated with these investments was neither safe nor profitable (Sheffrin 2003)(1). CDOs are a kind of structured Asset-Backed Security which is labeled as ABS whose payments and values are primarily derived from a set of a portfolio of fixed income with underline assets as in favor of the buyers with a fixed duration.
CDOs are divided into different risk tranches or classes as senior trenches which are considered as the safest securities for the investors. The principal payments and the interests are made in order of seniority as maximum with the senior trenches and the lowest with the junior tranches depending on the duration and maturity of the CDOs. The nature of transactions and the transfer of ownership of these CDOs are in a flexible and are regularly transferred from one owner to that of the other with a shifting of profit margin from the buyer towards the seller.
The junior tranches are offering higher coupon payments along with the interest rates and the lowest prices to compensate for the additional default risks as are associated with these CDOs. The level of risks is always associated with the transactions, and the ratings of the Collateralized Debt Obligations (CDOs) are in the fluctuating model depending upon the size and the nature of the financial transactions as are accomplished with the sales and purchases of the CDOs.
Many of the CDOs are valued on the basis of mark to the market mechanism and thus, have witnessed substantial right-downs on the balance sheet of the investors as entirely based on their market value along with its collapsed status. The investment as made through the CDOs, therefore, is considered as a volatile and risky business transaction and the investors are investing in these financial instruments as on the basis of their face value and the maturity period and as on speculations(Dodd et al.
1951)(2). However, the fear of their collapse is always attached to the investment as made through these transactions in the financial market. The establishment of the Collateralized Debt Obligations: The Collateralized Debt Obligations (CDOs) were issued initially in 1987 by the bankers Drexel Burnham Lambert Inc. for imperial savings association which was a saving institute that later termed as insolvent and was taken over in 1990 by the Resolution Trust Corporation. In the subsequent years, the CDOs has emerged as the fastest-growing instrument of the assets-backed synthetic in the securities market for its capitalization.
The growth in the CDOs is reflecting the increasing acceptance of these financial instruments with an objective to enhance the number of assets managers and the investors. These investors include mutual fund companies, commercial banks, pension fund managers, investment banks, unit trusts, private bank organization and the individual investors through the structural investment vehicles and other CDOs. The investors were investing in the set mode of financial investments as these were offering 2 to 3 percentage points higher than other financial opportunities as for example, corporate bonds with the same level of the credit ratings for the same fixed period of investment.
The investors are executing their investments in the financial modes with the greater profit margins as the CDOs has provided to their potential investors and the manufactures. The CDOs has witnessed a period of their growth during the year 2001 with the introduction by David X. Li of Gaussian copula models which had offered rapid pricing for the CDOs. The period of growth as witnessed by the CDOs was mainly driven by a high level of profit as compared to other financial arrangements as on future based financial transactions.
1. Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 271. ISBN 0-13-063085-3.
2. Graham, Benjamin, and David Dodd (1951). Security Analysis. McGraw-Hill Book Company. ISBN 0071448209.
3. Barry Eichengreen and Kris Mitchener 2003 "The Great Depression as a credit boom gone wrong", Bank For International Settlements, Working Papers No. 137 (September 2003). Retrieved 2007-05-08.
4. Mishkin, Frederic S. (2007). The Economics of Money, Banking, and Financial Markets (Alternate Edition). Boston: Addison Wesley. p. 8. ISBN 0-321-42177-9.