Have been looking at some threads about this, but none of them seems very clear. Could anyone please clarify what’s the difference btw ABS and CDO?
ABS is a security backed by pool of loans or receivables (Assets), and CDO “are backed by pool of one or more debt obligations”, this last definition is what makes me confused. Further, it seems that you can collateralize this bonds with loans, which are an asset! So it’d be pretty similar to an ABS.
The only explanation I found is the case where you issue securities and use the proceeds to buy, for example bonds, so the securities are secured with those bonds. Again, if you are securing with a bond, is an asset for you, isn’t it? Or is it just that bonds are generally considered “debt-securities” and therefore securing with a bond is considered a CDO?
Thanks in advance!!
P.S: Neither I do understand why the motivation is usually to remove debt instruments from balance sheet…
Think of a CDO as a structured ABS, just as a CMO is a structured MBS.
If a company has too many loans as assets, or questionable loans as assets, it may want to remove the riskiness of those loans from its balance sheet. One way to do that is to transfer the loans to an SPV which creates a CDO.
but the creation of a SPV needs to fulfill certain conditions e.g. the credit worthiness, validity of valuation amount, etc etc, then how will this be different from listing in the company’s bal sheet if the assets are indeed of good quallity??
thanks…
P.S S2000 magician…need to get back finance knowledge after L3 exams, can u recommend me some books to read or websites to keep myself fresh? i cannot even solve the questions i know 3 months back!
P.S P.S i read that ur really a magician…and i want to go to the magic castleone day!