tag:blogger.com,1999:blog-30643134.post8599801395314497790..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: How does a CDO work?Accrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-30643134.post-85948755696916751042013-08-09T05:59:47.870-05:002013-08-09T05:59:47.870-05:00Fuck these people
Fuck these people<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-34024775513488925872009-11-09T22:35:58.507-05:002009-11-09T22:35:58.507-05:00Thanks for that explanation Tom; I think I'm b...Thanks for that explanation Tom; I think I'm beginning to at least gain some conceptual understanding of this type of security even if I may never be able to accurately predict what they are going to do.<br /><br />- i second the motion<br /><br /><a href="http://www.loanmodifyexpress.com/" rel="nofollow">loan modification ca</a>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-32597702905638795202009-09-12T14:24:39.506-05:002009-09-12T14:24:39.506-05:00AI,
Sorry, I seem to have stumbled on your blog a...AI,<br /><br />Sorry, I seem to have stumbled on your blog a bit later than most. Actually, what you have described here is a description of how a residential MBS with OC and IC triggers works, except that in MBS the equity is called the non-rated tranche. CDOs work the same way, with principal paying off bonds sequentially and losses applied in reverse, but there are many factors which make CDOs more complicated. First off, they are generally private placements, so documents and data on them are hard to come by. In addition, CDOs were most often resecuritizations of existing debt instruments (e.g. B-rated RMBS debt), so AAAs are leveraged against losses to the 2nd power. Also, there were static vs. managed deals. The latter were not REMICs, as the collateral was not fixed at issuance and could be swapped out, usually for a five-year period. Moral hazard, anyone? Deals were being sold based on cashflows getting posted on Bloomberg but no one such as Intex tied out with them or the prospectus, eventually leading to chaos in and disappearance of the 2ndary market. Once the parade really got going, CDOs were being done based on synthetic collateral; in other words, selling a credit default swap on an asset or a pool of assets. Once you could do deals without owning the collateral or tying out with Intex, it became the free-for-all we know about now. Citi and Merrill, thanks for nothing!crabsofsteelhttp://www.panix.com/~blumm/blumm.htmlnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-83185926334173946272009-08-06T08:22:01.221-05:002009-08-06T08:22:01.221-05:00nice blog and nice content
please visit my blog an...nice blog and nice content<br />please visit my blog and make me a blogger<br /><br />http://forex-infotrade.blogspot.com<br /><br />tanxllingeshhttp://forex-infotrade.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-87981649160106162812008-10-06T12:17:00.000-05:002008-10-06T12:17:00.000-05:00Good Explanation !!Good Explanation !!Unknownhttps://www.blogger.com/profile/09215216258841301949noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-61459504060585055022008-09-25T23:41:00.000-05:002008-09-25T23:41:00.000-05:00Hey thanks a lot Tom!..awesome explanationHey thanks a lot Tom!..awesome explanationkunalhttps://www.blogger.com/profile/04063875665853899855noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-44918044270279922942008-07-01T07:56:00.000-05:002008-07-01T07:56:00.000-05:00Monte Carlo is the way to analyze cash flows of a ...Monte Carlo is the way to analyze cash flows of a CDO. Of course, it was bad inputs into MC simulations that lead to so many poorly rated CDO deals!Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-17218974115071468862008-07-01T07:27:00.000-05:002008-07-01T07:27:00.000-05:00One of the best explanations I have read so far on...One of the best explanations I have read so far on CDOs...great job!<BR/><BR/>One last question: what is the standard approach (if there is one) for valuing those securities, apart from relying on a secondary market driven by demand and supply? Do you think a Monte-Carlo simulation of correlated default paths would make it ?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-59743446523898387032008-06-01T15:55:00.000-05:002008-06-01T15:55:00.000-05:00I post this comment because I think the author has...I post this comment because I think the author has mada a fundamental error in his thinking: He thinks that redistribution of risk through the entire economy (or banking system) is a good thing.<BR/><BR/>In fact this is not correct: The complicated stuff that is traded only pumps up the risk of an entire system default.<BR/><BR/>Motivation: Even the financial people have problems with understanding when and how CDO's break down.<BR/><BR/>And now that we are likely on a path that will wipe out over 10 trillion US$ in US family home equity, who knows what will happen?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-55977179190769581192008-03-18T09:51:00.000-05:002008-03-18T09:51:00.000-05:00Thanks, after reading that definition, I am more c...Thanks, after reading that definition, I am more confused then ever.Kevin Surbaughhttps://www.blogger.com/profile/07863514672517538661noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22475374756855907212008-03-18T02:07:00.000-05:002008-03-18T02:07:00.000-05:00Thanks for the explanation. How would you know by ...Thanks for the explanation. How would you know by reading through a CDO offer document that a senior subordinated notes tranche was in fact an equity tranche especially when the details suggest it is to bear interest at a stipulated fixed rate from a stipulated date? Are there any clues in the document that would suggest it was an equity tranche other than it having no rating?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22868087573936561952007-11-11T00:49:00.000-05:002007-11-11T00:49:00.000-05:00TDDG,A silly question for you:a.if the CDO manager...TDDG,<BR/><BR/>A silly question for you:<BR/>a.if the CDO manager is being forced to sale the assets or collaterals is the new buyer just owned the underlying pool of borrower or they got a tranche?(think of senior trance here)<BR/>B.I know it is on the wrong section here but in your do not underestimate piece, what is the hyphotetical break even price of that senior tranche with say 15% default rate and 30% recovery rate<BR/>C. How many quarters is normally the through from writedowns to recovery via extra ordinary income in accounting for bank operating in housing loan?<BR/><BR/>Cant help myself for asking you a lot of question ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-17149616678708955842007-11-09T07:34:00.000-05:002007-11-09T07:34:00.000-05:00Many banks put guarantees on their SIV debt. So th...Many banks put guarantees on their SIV debt. So they may be forced to take it on balance sheet.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-28934556605311384772007-11-09T06:26:00.000-05:002007-11-09T06:26:00.000-05:00What is the obligation banks have to their off-bal...What is the obligation banks have to their off-balance sheet entities- I thought they can cut them off and let them fail.(except for the few instances like MER which had committed to buy-back terms with a hedge fund (WSJ, Nov 2nd).<BR/><BR/>Or is there such a strong implicit guarantee to their SIVs?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-71029066657673288762007-10-17T16:12:00.000-05:002007-10-17T16:12:00.000-05:00By par erosion, do you mean where the CDO manager ...By par erosion, do you mean where the CDO manager buys an assets above or below par?Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-58630302736042383292007-10-17T16:04:00.000-05:002007-10-17T16:04:00.000-05:00Great job! Can you describe par erosion in CDOs? W...Great job! <BR/>Can you describe par erosion in CDOs? What can a manager do in this case and when does par erosion trigger an early payout?<BR/><BR/>Any help would be great.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-57777301909672865642007-08-05T10:36:00.000-05:002007-08-05T10:36:00.000-05:00Great stuff!But WHY do CDOs happen? An interestin...Great stuff!<BR/><BR/>But WHY do CDOs happen? An interesting answer here:<BR/><BR/>http://www.newcombat.net/article_whats_a_cdo.htmlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22096013004454345462007-07-26T07:25:00.000-05:002007-07-26T07:25:00.000-05:00Equity gets whatever is left. Its easiest to think...Equity gets whatever is left. Its easiest to think of the CDO like an operating company. The equity holders own the operating company and have borrowed to buy all the supplies they need to operate. At the end of the day, once all their expenses and debt service is paid, what do they get? Whatever is left.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-83735574317940169552007-07-26T04:32:00.000-05:002007-07-26T04:32:00.000-05:00Hi,Could i just clarify whether the equity tranche...Hi,<BR/><BR/>Could i just clarify whether the equity tranche gets a fixed rate coupon or it gets whatever that is left after all the distribution?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-47214014039911035022007-07-23T06:47:00.000-05:002007-07-23T06:47:00.000-05:00Nicolas:For simplicity, I assumed the yield on the...Nicolas:<BR/><BR/>For simplicity, I assumed the yield on the <I>performing</I> bonds remained the same, and reduced the par value of bonds in total. So I went from $100 par times 7% yield to $99 (or 2% defaults with 50% recovery) times 7% yield. The interest collected goes from $7 to $6.93.<BR/><BR/>Some argue that the yield would probably fall, because the bond most likely to default is going to be your highest yielding bond. That's probably true. But that was getting too complicated for my post.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-21490767386689093592007-07-23T03:28:00.000-05:002007-07-23T03:28:00.000-05:00Tom, I still have one more naive question: after t...Tom, I still have one more naive question: after the first default on the collateral portfolio, why the yield of the collateral remain unchanged? <BR/>Thanks, NicolasAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-72178122320526025242007-07-20T07:16:00.000-05:002007-07-20T07:16:00.000-05:00Because people in banking usually talk in terms of...Because people in banking usually talk in terms of yield and people in investment management usually talk in terms of total return. Bankers don't live in the constant mark-to-market measure you versus an index world. On the other hand, investment managers are OK with losing money so long as the index lost more. Bankers can't get away with that. Its just two different worlds.<BR/><BR/>Actually, CDO spreads are almost universally wider than similarly rated corporate bonds. I'd say there are various reasons for this. Lower liquidity is an obvious one. But I also think the "worst case" is worse for a CDO than an individual bond. If a CDO tranche defaults, the odds are its worthless. Particularly junior tranches. This is because all the cash flow in the deal will be diverted to pay the senior tranches down, likely leaving nothing for the junior tranches. I'm planning on writing a post about this idea sometime soon.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-52972323213077428302007-07-20T01:39:00.000-05:002007-07-20T01:39:00.000-05:00Hi Tom, you should have put money on your bet...th...Hi Tom, you should have put money on your bet...<BR/>thanks for the explaination. I guess the spread is function of the market price for similar securities? thanks<BR/>(how did u know for banking..?)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-72079105157544900892007-07-19T06:44:00.000-05:002007-07-19T06:44:00.000-05:00I'm going to make a bet that Nicolas is in banking...I'm going to make a bet that Nicolas is in banking. Am I right?<BR/><BR/>The stated yield is usually 3 month LIBOR plus a spread. Sometimes its 1 month LIBOR. Either way, the coupon would be set at whatever 3 month LIBOR is at the coupon date plus the spread. So the AAA tranche might be LIBOR + 23. Today 3 month LIBOR is 5.36%. So the coupon for that 3 month period would be 5.59%.<BR/><BR/>If the bond is trading above or below par, then you'd amortize the premium/discount over the expected life of the issue and add/subtract that from the coupon rate. <BR/><BR/>On the equity tranche, there isn't a yield per se. Really only a total return.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-65938356782381974232007-07-19T01:14:00.000-05:002007-07-19T01:14:00.000-05:00Hello Tom, thanks for your blog, I really enjoy re...Hello Tom, thanks for your blog, I really enjoy reading it!<BR/><BR/>One question however on your cdo example: how do you compute the yield on each tranche?<BR/><BR/>thanks, NicolasAnonymousnoreply@blogger.com