CMO vs CDO
There are several product categories within the Investment Bank and one of them is the Structured Finance Category. It is a complex method of financing that aims to reduce significant risks associated with complex assets. These instruments are designed to meet the unique requirements of an investor, depending on the risk tolerance, with a variation of customized assets.
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CMO also referred to as Collateralized Mortgage Obligation is a type of mortgage-backed security that contains a pool of mortgages bundled together which are sold as investments. These fixed income instruments are backed by mortgages or a pool of mortgages.
Collateralized Debt Obligation derives its value from an underlying asset and therefore is a particular type of derivative. It is a complex structured financial product that is backed by a pool of loans and other assets which are then sold to institutional investors. On default of a loan, cash collected is paid in tranches on the basis of seniority.
Key Differences- CMO vs CDO:
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CMO & CDO may seem very similar but are very different from each other. CMO’s are backed by private parties and quasi governments while CDO’s are private-labeled. During the implosion of real estate in 2007 small portion of CMO’s was considered subprime while CDO’s made subprime CMO’s their core holding. The characteristics of both the products are to pool loans and assets together and then match the investors with cash flow thereby allowing the investor to decide how much risk they want to take. CDO’s are a relatively small market as compared to CMO’s.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).