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Collateralized Debt Obligation

By Edited Nov 13, 2013 0 0

 

 

The financial markets can be very confusing. There are many types of derivatives on the market that are complex. CDO's or collateralized debt obligations are one of those securities that are complicated, but with the right explanation you will be able to fully understand them.

 

Definition

The investopedia definition of a CDO is

"An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.  "[2549]


This definition means that a CDO is  a investment backed by bonds,loans and other assets. CDO's tend to be a package of a bunch of loans together. The types of loans vary greatly, some loans are safe while some are risky, some mature in a few years while some mature in a long time. The thinking behind this is that if you pool together a large amount of loans of different risks, you can make an investment that is diversified and safe. 

Many large investors buy CDO's Hedge funds and Pension funds are big buyers of these investment vehicles.  Despite conventional belief, CDO's can be a very safe investment.  Some borrowers are very trustworthy. CDO's can also be very risky investments though. If you are a small time investor looking for a new investment opportunity then  this article will help you. While small investors are discouraged from buying CDO's, there still is a way to get into the market without spending too much money.

How Do Everyday Investors invest in Collaterized debt obligations

  There are many stocks,reits,mutual funds and exchange traded funds that allow investors to capitalize on CDO's profits, below I have listed a few different investments that allow investors to invest in the CDO market.

CYS Investments Inc (CYS)


CYS Investments Inc is a financial company that strives to achieve consistent risk-adjusted investment income. The company invests in all sorts of investment vehicles including  collateralized mortgage obligations and collaterized debt obligations. The company buys and hold most of these types of derivatives in the hopes of producing steady income. The company went public in 2009 and has been producing steady dividends ever since. They have a dividend yield of around 14% and the company has a P/E ratio of about 9. 

 

SPDR S&P Mortgage Finance ETF (KME)

SPDR S&P Mortgage Fiance ETF is an exchange traded fund that seeks to match the returns and characteristics of the S&P Mortgage Finance Select Industry Index.  In order to do that the fund buys derivatives to try to match the index. With a Beta of over 1, this fund is a little volatile but offers steady returns. The company also provides dividends of around 20 cents.

 

IShares FTSE NAREIT Mortgage Plus Capped ETF (REM)

iShares FTSE NAREIT Mortgage Plus Capped ETF makes investments that  correspond generally to the  yield performance of the FTSE NAREIT All Mortgage Capped Index. The fund does this by investing in derivatives such as CDO's The funds Beta is .77 which is fairly good considering the fact that they invest in risky financial company's. 99% of the ETF's portfolio consists of stocks. Like many other ETF's the company gives solid dividends.

 

Market Vectors Mortgage REIT ETF (MORT)


Market Vectors Mortgage Reit is a mortgage reit that invests in U.S and International mortgage securities. the fund try's to invests at least 80% of total assets in securities that comprise of benchmark indexes. The Fund was started in August of 2011 and has over 40 million dollars worth of assets. Since the fund is fairly new, there has been little written about it, but it has performed well over the past few years and is a good ETF to consider.

 

As you can see, CDO's are investment securities that even individual investors can capitalize on. They offer strong steady returns and allow investors to diversify their assets. The derivatives are not free of controversy though, and have gotten a lot of coverage from the media. Still it is my opinion that if you are smart and know were to look, you can make money investing in Collaterized debt obligations.

 

 

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Bibliography

  1. "Collateralized Debt Obligation." investopedia. 1/1/2011. 1/10/2012 <Web >

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