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What is a Collateralized Debt Security (CDS) ?
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Going by the dictionary meanings, Collateralized Debt Security or a CDS, should have meant any loan, or security, taken against a collateral (anything to back up a loan, for eg. an asset as a mortgage).
But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CDS’s.
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Therefore the technical definition of CDSs would be:
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Collateralized Debt Securities (CDSs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.
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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):
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1. Asset Backed Securities (ABS), or 2. Asset Backed Obligations, or3. Mortgage Backed Securities (MBS), or 4. Mortgage Backed Obligations, or 5. Collateralized Debt Securities (CDS), or 6. Collateralized Loan Obligations (CLO), or 7. Collateralized Mortgage Obligations (CMO).
. . These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
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Other Posts Related to Securitization:
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3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
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