Basics of CDOs

Collateralized debt obligations, or CDOs, are an evolving and growing presence in today's capital markets. According to Credit Flux, the volume of outstanding cash CDOs stood at $986 billion at the start of 2007, and U.S. cash CDO issuance approached $400 billion in 2006. CDOs offer investors several advantages, including diversification opportunities, varying risk/return profiles, and exposure to asset classes that are often difficult to invest in directly. This chapter provides the basics of CDOs and helps to limit the misconceptions about the dynamic market. The chapter concludes with a closer examination of the many half‐truths and myths that permeate the market should help clear away some of the most common misconceptions.