- Cash CDOs invest directly in securities bought from the sponsor or in the market. Synthetic CDO’s invest indirectly through credit derivatives like credit default swaps or total return swaps.
- While cash CDOs have supply constraints due to high demand for underlying securities, synthetic CDOs can be more easily created and tailored to meet demand.
- Since the underlying instruments are credit derivatives, there is not only credit risk (to the reference obligor) but also counterparty risk.
- ABS different from corporate bonds—no technical default if interest unpaid, no scheduled principal payments.
Finished: 8-Sep-08