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In class we discussed the creation of a simple type of MBS- a pass through security. In the assigned CFA reading, you learned about CDOs
In class we discussed the creation of a simple type of MBS- a pass through security. In the assigned CFA reading, you learned about CDOs (collateralized debt obligations- or CMOs specifically for mortgages) and CDS (credit default swaps). Briefly describe the differences between a pass-through security and a CDO/CMO. Imagine an investor purchased a relatively risky tranche ("slice") of a CDO/CMO. Describe how participating in the CDS market for that security could change the investors potential risks and payoffs.
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