CDO vs. CMO vs. CBO

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lev

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Need to know the bottomline distinctions. Appreciate if someone could comment. Avoiding boyscout camp (i.e. investopedia.com) definitions is MUCH appreciated.
 
Correction: Not so much a distinction (which is obvious), but more of a structure of these instruments.
 
I think there are tons of differences and you should go look it up. The collateral is different, the structures are different, the risks are different, the reasons they exist are different, etc....
 
The bottomline is all of these structures attempt to reduce some form of risk by setting up tranches.
 
Let's say company A wants to issue a CDO. What does it need to do in order to issue one? Would the example below show the basic mechanics in a correct manner?

Company A prints a bunch of certificates and calls the whole issue CDO.

Cert X: You are entitled to a stream of principal payments
Cert Y: You are entitled to a stream of principal and interest payments (subordinate to X)
Cert Z: You are entitled to a stream of interest payments (subordinate to X and Y)

When the investors purchase all three kinds of certificates, company A goes to the market and buys bonds, mortgages, etc. It then posts these securities as pass-through collatoral.

I couldn't find the mechanics anywhere, so I had to make it up. Does this resemble the reality in any way?
 
No. CDO's are used primarily for default risk not the prepayment risk IO/PO kind of thing given here. A plain vanilla CDO structure has three tranches (like a CMO) and the first tranche eats the first x defaults, the second tranche eats the next y defaults, and the third tranche gets whatever is left. Of course, the easiest way to create one is to choose some index, sell CDS's on all the issues in the index and divide the obligations into tranches. BTW - the guy who takes on the first tranche usually gets paid to buy the tranche even though he collects interest.
 
Thanks, Joe. You got me all confused, though. "...choose some index, sell CDS's on all the issues in the index and divide the obligations into tranches." I get the CDS part - it's a form of an insurance for all the longs in the index. Who's taking the short side in an index - the issuer?
 
Suppose I want to create a CDO on a BBB bond index that is published by Goldman or someone. I can create default risk by selling CDS and my default risk should be the same as owning the underlying bonds. If my CDO is about divvying default risk, I just divide up the CDS obligation. This structure requires less cash than actually buying the bonds.
 
Lev - CDO Stands for Collateralized Debt Obligation, it can be a combination of CLO and CBO or CLO/CBO/CMO. Punchline is CDO is a portfolio management product where handful of Investors pool in money - make a portfolio and starts trading from that portfolio. Companies rather going to conventional banks to borrow funds they go to portfolio manager, who is managing CDOs or CBOs or CLOs or CMOs. CBO portfolio only contains bonds whereas CLOs incorporates loans and CMOs mortages - I hope this explanation will help -
 
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