cdo
"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 "
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