Collateralized Debt Obligation Cubed (CDO-Cubed)

What Is a Collateralized Debt Obligation Cubed?

A collateralized debt obligation cubed (CDO-cubed) is a derivative security backed by a collateralized debt obligation squared (CDO-squared) tranche.

A CDO-cubed is basically a triple derivative, that is a derivative of a derivative of a derivative — which is the reason it has been called "derivatives on steroids."

Understanding Collateralized Debt Obligation Cubed CDO-Cubed

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and different assets and sold to institutional investors. A CDO is a specific type of derivative on the grounds that, as its name suggests, its value is derived from another underlying asset.

These assets become the collateral assuming the loan defaults. 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 enhance risk.

A collateralized debt obligation cubed (CDO-cubed) is comparative in many regards to a standard CDO, with the exception of the types of assets getting the obligation. Not at all like a CDO, which is backed by a pool of bonds, loans, and other credit instruments, CDO-cubeds are backed by CDO-squared tranches, which are derivatives backed by a pool of bonds, loans, asset-backed securities, and other credit instruments.

CDO-cubeds permit banks to exchange the credit risk that they have taken by and by, by repackaging their CDO-squareds. CDO-squareds and CDO-cubeds can be repackaged on many times to make derivatives that are very unique in relation to the original underlying debt security. These are additionally alluded to as CDO^n to show the obscure depth of a portion of these securities.

Not at all like traditional derivatives, which are utilized to hedge risk or make leveraged wagers, CDO-cubeds are an innovation that has generated huge number of new investment assets, covering the whole range of risk and return.

Collateralized Debt Obligation Squared (CDO-Squared)

A CDO-cubed utilizes a collateralized debt obligation squared (CDO-squared) as its underlying security. A CDO-squared is one more structured product structured where a bank takes their collateralized debt obligations and designs them into tranches with various maturity and risk profiles. These tranches then fund the payments to the investors in the CDO-squared special purpose vehicle.

The collateralized debt obligation squared itself is backed by the pool of collateralized debt obligation (CDO) tranches and payments to investors are produced using payments made into the different tranches.

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

Features

• Since CDO-cubeds are a derivative of a derivative of a derivative (a "triple derivative") they can be very complex and carry unique risks.
• A collateralized debt obligation is a structured financial product that is backed by a pool of loans and different assets.
• A collateralized debt obligation cubed (CDO-cubed) is a structured product that is backed by a CDO-squared, which is itself a structured product backed by a pool of CDOs.