Collateralized Debt Obligation Squared (CDO-Squared)

What Is a Collateralized Debt Obligation Squared (CDO-Squared)?

A collateralized debt obligation squared (CDO-squared) is an investment as a special purpose vehicle (SPV) with securitization payments backed by collateralized debt obligation tranches. A collateralized debt obligation is a product structured by a bank in which an investor purchases a share of a pool of bonds, loans, asset-backed securities, and other credit instruments. Payments coming about because of those bonds, loans, asset-backed securities, and different instruments are then given to the holders of the shares of the collateralized debt obligation. It is a method for investing in various credit instruments and expand risk.

Understanding Collateralized Debt Obligation Squared (CDO-Squared)

A collateralized debt obligation squared (CDO-squared) is one more product structured by a bank. The bank takes their collateralized debt obligations and designs them into tranches with various maturity and risk profiles. These tranches then, at that point, fund the payments to the investors in the CDO-squared special purpose vehicle. The collateralized debt obligation squared is backed by the pool of collateralized debt obligation (CDO) tranches and payments to investors are produced using payments made into the different tranches.

The collateralized debt obligation squared is like a collateralized debt obligation with the exception of the assets getting the obligation. Not at all like the collateralized debt obligation, which is backed by a pool of bonds, loans, and other credit instruments; collateralized debt obligation squared arrangements are backed by collateralized debt obligation tranches. Collateralized debt obligation squared investments permit the banks who own the standard collateralized debt obligations to exchange the credit risk they have taken on.

Since consumers stopped making financing payments for the vast majority of the assets backing the collateralized debt obligations and hence the collateralized debt obligations squared, the CDO and CDO-squared market fell during the 2008 global financial crisis.