"The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating - meaning it has close to zero credit risk."
"In simple terms, one could say that a CDO is like a vow to pay an amount of money to investors. This is done in pre-determined series. Of course, the amount of money depends on how much money the CDO gets from the underlying assets. The whole CDO-system is possible as long as investors are prepared to invest money, which is used to buy the group of assets the CDO owns(D. Duffie, N. Garlea nu, 2001)]. In other words, the CDO needs money invested in its foundation, which hopefully results in a good return."
"A CDO is like an apartment building and they make money as long as all the "rooms" are rented out, and "tenants" are paying the rent "
METAMIA is a free database of analogy and metaphor. Anyone can contribute or search. The subject matter can be anything. Science is popular, but poetry is encouraged. The goal is to integrate our fluid muses with the stark literalism of a relational database. Metamia is like a girdle for your muses, a cognitive girdle.