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FINANCIAL MARKET COURSES

Securitization - CDOs - Structures & Ratings

In terms of structure, there are two types of collateralized debt obligation (CDO): cash flow CDOs and market value CDOs. They differ crucially in the way collateral is used to generate cash flows to pay noteholders, in how the structure is credit-enhanced, and in how the underlying collateral pool is managed. The ratings process for these structures also differs.

 

In this course, we will examine the structural differences between cash flow and market value CDOs. We will also observe how these instruments are rated, which is crucial to the pricing of a CDO. Finally, we will look at some commonly used exotic CDO structures.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Define the structural specifics of cash flow and market value collateralized debt obligations

    Describe how rating agencies rate cash flow and market value collateralized debt obligations

    Identify the most commonly used exotic collateralized debt obligations

  • COURSE OUTLINE

    Topic 1: CDOs – Structures

    CDO Structures

    Cash Flow CDOs

    Cash Flow CDOs – Role of a Manager

    Coverage Tests

    o Par Coverage Test

    o Interest Coverage Test

    Market Value CDOs

    Market Value CDOs – Role of a Manager

    Advance Rates

    Advance Rates and Overcollateralization Test

    OC Test – An Example

    OC Correction – An Example

    Minimum Net Worth of Equity Test

    Cash Flow CDO and Market Value CDO

    Topic 2: Exotic CDOs

    Structured Finance CDOs

    Collateralized Fund Obligations – Basics

    Collateralized Fund Obligations – Overcollateralization Test

    CDO Squared

    Topic 3: CDOs – Ratings

    CDO Ratings

    Cash Flow CDO

    o Expected Probability of Default

    o Default Correlation

    o Timing of Defaults

    o Loss Given Default (Default Severity)

    Structural Considerations

    Market Value CDO

    o Mix of Collateral Assets

    o Ability of the Structure to Withstand Price Declines

    o Ability of the Collateral Manager

    Ratings Agency Models

    o Moody’s Binomial Expansion Technique

    o Standard and Poor’s CDO Evaluator

    o Fitch’s VECTOR Model

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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