Collateralized debt obligation (CDO) | Finance & Capital Markets | Khan Academy

Any type of bond But now what you read most in the newspaper You can do it with company debt You can use the company's receivables to do You can do it with other assets Explanation on how and why they got in trouble It has made a lot Actually you can do this kind of backed by assets Hedge funds are in trouble We did a mortgage I think i will do another Mortgage bond Mortgage debt securities Looking forward to discussing these with you And to some extent This is actually guaranteed by the mortgage This is a form of mortgage debt bond Welcome back Well, in the last explanation We talked about a group of borrowers They need a billion dollars in total Because they have a thousand people and each needs a million Come to buy a house And they started from a Borrow money from special purpose entities They borrowed money from a local mortgage broker Then the broker sold it to a bank In other words, the company founded this Special purpose entity investment bank Then they publicly issue shares for this special purpose entity From those who buy mortgage securities Where people raise money But actually invested in Mortgage Securities Investor Funds provided to this special purpose entity So that it can lend to loan buyers And the reason we call it securities is It’s not just these people who get this 10% return every year But if they want- Suppose you bought mortgage securities And you paid a thousand dollars You will get this 10% every year But suddenly Do you think the whole mortgage industry About to collapse Many people will default and you want to quit If you just lend someone a loan Then there is no way to get out You have to sell the loan to someone else But if you have mortgage securities You can actually trade securities with other people They might pay you, who knows They may pay you more than one thousand dollars They might pay you less But in the stock market there will be at least one Type of transaction (expensive sale or cheap sale) This is liquidity Liquidity means if I have securities I can sell it I can sell it as if I could trade an IBM stock Or I can trade a share of Microsoft stock We have said this securities before In order to value it You have to do an analysis Analyze what it is worth Or you have to take into account that people will repay early And mortgage default factors Real interest rate and Other things Long-term interest rates, etc.

And maybe only a small number of people Can design a model for calculation The model may be very complicated There may be some other types of investors Such as this person He likes to invest in securities But he thinks this risk is too high He hopes he can Invest in low-risk investments Would rather get a low pay Maybe legally Pension fund or some type of mutual fund Have to invest in some Graded securities Suppose there is another investor here And he thought it was boring What you know 9% 10% Not worth mentioning He wants a bigger return So if he invests in this security and wants There is no hope for better returns So now we have to use this mortgage securities Introduce a step to do some further permutation Or something derived This is derivatives You may have heard the term derivatives People waved their hands and said Oh it is a more complex form of securities Derivatives means you have a type of asset And you divide it in a way to spread the risk Or something like that So you created a derivative asset It is derived from the original asset So let's see how we can use this same asset Same loan Satisfy all those people Satisfy these people They want it may be low risk and low return And this person wants to take a little high risk Return with high yield So now this situation We have the same borrowers They borrowed a billion dollars in total, right? Because there are a thousand borrowers and so on And they are still a special purpose entity but now Special purpose entities Divide into one million parts What we have to do is We first divide it into three parts We call it classification In fact, classification is divided into individual asset units We are divided into three levels of equity Intermediate priority These nouns Often used in this industry Priority means if this entity has a loss These people get their money back first It is the least risky of all classifications Intermediate means the second or intermediate level These people are in between They have a little more risk But they can get a little more reward than priority But they are less risky than equity level Equity level These are the people who lose money first Suppose some borrowers start to default All losses are borne by the equity level So it protects priority And intermediate level from default losses So in this case Need a billion dollars– $400 million comes from priority $300 million comes from the intermediate level Then 300 million US dollars comes from the equity level The US$400 million priority (asset pool) is our Raised with a thousand senior securities Mortgage debt At this There are four hundred thousand of this security And one thousand dollars each, right? Let's assume it costs a thousand dollars We issued 400,000 So we raised 400 million US dollars Suppose we give these people a 6% return You might say 6% is not much But these people have very low risk Because they want to make them less than 6% The value of this billion dollar asset or billion dollar loan Will have to be reduced to 400 million US dollars Maybe I will use a little more math in another example But I think you can understand For example, we say every year There will be 100 million dollars in repayment, right? Because the interest rate is 10% Pay 100 million dollars Should pay 6% of US$100 million and US$400 million That is to pay 24 million dollars Right? So 24 million dollars will flow into the priority asset pool The same is true for the issuance of securities in intermediate assets 300,000 shares at US$1,000 each This is also a thousand This is an intermediate asset pool Suppose they get a higher return of 7% These percentages are often determined by Certain type of market or people’s wishes But suppose it is fixed now Assume 7% So 300,000 shares 7% These people will get 21 million dollars Right? So 100 million dollars per year 24 million will be given to these people 21 million will be given to these people Then no matter how much is left Will give equity-level asset pool Equity level has 300 million US dollars They will get 55 million dollars The premise is that there is no default and advance payment Or anything unfavorable to these securities happens These people will get 55 million dollars That's 16.5% for 300 million US dollars I know what you think Children Thrall this sounds amazing Why not everyone wants to be an equity investor? I do not know My pen is not working But anyway, I try not to move the pen only So why don't you say that everyone thinks What about being an equity investor? Ok i ask you a question What will happen? in case- Let's go back to the plot we discussed earlier 20% of borrowers say you know? I can't repay the loan I want to return the key to the house This 20% you can only get back 50% of the money So every one million dollar house You will only be able to sell for half a million dollars Not get 100 million dollars a year But you will get 90 million dollars a year I hope I can use a pen Some things won't move on my computer So it’s not 100 million dollars a year You will only get 90 million dollars a year now Right? Suddenly these people will not be cut off These people will still get 24 million dollars These people will still get 21 million dollars But these people will get 45 million dollars But he can still get a higher income than the average water product Now let’s assume the situation is worse Assuming many borrowers Began to default on their loan Not get 90 million dollars a year But only get fifty million dollars a year Now you pay these people 24 million dollars To pay these people 21 million dollars Or this group of people-21 million dollars Then the remaining five million for these people Five million dollars divided by 300 million Now get less than 2% gain So this guy takes high risks and gets high returns If everyone repays the loan, of course he gets a 16.5% return But if there are many breaches We assume The monthly return is halved This guy bears all the losses So his return is 0 So he is high risk and high return But these people are not affected Of course if enough people start defaulting Even these people are beginning to suffer

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