Issued by the U.S. Treasury and stripped by a financial intermediary, these products are sold at a significant discount from face value and pay no interest during their lifetime. However, they return full face value and cannot be called away. These bonds were issued between 1982 and 1986. |||CATS are secure investments backed by the U.S. government, and are part of the feline family of U.S. Treasury zero-coupon offerings (CATS, COUGRs, LIONs and TIGRs). CATS became obsolete when the U.S. government began directly issuing its own STRIPS in 1986.
A theory on corporate debt that posits that the likelihood of default decreases when two firms' assets and liabilities are combined through a merger or acquisition compared to the likelihood of default in the individual companies. The co-insurance effect relates to the concept of diversification, as risky debt is spread across the new firm's operations. |||If the co-insurance effect is true, firms that merge may experience financial synergies through combining operations. Furthermore, the combined debt should be safer than before, which should reduce the yield investors demand from the corporation's bonds. This can reduce the cost of issuing new debt for the company, making it cheaper to raise additional funds.
A restrictive type of mortgage that cannot be prepaid, renegotiated or refinanced without paying breakage costs to the lender. This type of mortgage makes sense for homebuyers who are not planning to move anytime soon and will accept a longer term commitment in exchange for a lower interest rate. Closed-end mortgages also prohibit pledging collateral that has already been pledged to another party. Also known as a "closed mortgage". |||A closed-end mortgage can have a fixed or variable interest rate and, along with open and convertible mortgages, is common in Canada. An open mortgage can be repaid early but will have a higher interest rate, while a convertible mortgage blends characteristics of closed and open mortgages.
A term in a bond contract that guarantees that the collateral used to back the bond issue cannot be used again to back another bond issue. This is the opposite of an open-end indenture in which more than one bond can be backed by a single collateral. |||If the bond issuer defaults, a closed-end indenture ensures the bondholders will have the only claims on collateral, making their bonds the most senior security. The fewer claims that exist on the collateral, the more safety a bondholder has.
A special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from loans. |||Collateralized loan obligations are the same as collateralized mortgage obligations (CMOs) except for the assets securing the obligation. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risks associated with lending.
A special purpose vehicle (SPV) with securitization payments in the form of tranches. A collateralized debt obligation squared (CDO-squared) is backed by a pool of collateralized debt obligation (CDO) tranches. |||This is identical to a CDO except for the assets securing the obligation. Unlike the CDO, which is backed by a pool of bonds, loans and other credit instruments; CDO-squared arrangements are backed by CDO tranches. CDO-squared allows the banks to resell the credit risk that they have taken in CDOs.
A special purpose vehicle (SPV) with securitization payments in the form of tranches. Collateralized debt obligation cubeds (CDO-cubeds) are backed by a pool of collateralized debt obligation squared (CDO-squared) tranches. |||These CDOs are identical to regular CDOs except for the assets securing the obligation. Unlike a CDO, which is backed by a pool of bonds, loans, and other credit instruments, CDO-cubeds are backed by CDO-squared tranches. CDO-cubeds allow the banks to resell the credit risk that they have taken once again by repackaging their CDO-squareds. CDO-squareds and CDO-cubeds can be repackaged countless times to create derivatives that quite different from the original underlying debt security. These are also referred to as CDO^n, to show the unknown depth of some of these securities.
An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. |||Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.
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