Collateralized Debt Obligations: Advantages and Disadvantages
In the previous article, we studied about how collateralized debt obligations (CDOs) are derivative instruments that have been built on top of other derivative instruments. They are complicated to understand and risky to trade. However, despite the various negative accusations against collateralized debt obligations (CDOs), they continue to be very popular. This is because they have some distinct advantages. In this article, we will have a closer look at the advantages and disadvantages which can be attributed to collateralized debt obligations (CDOs).
Advantages of Collateralized Debt Obligations (CDOs)
At first glance, it might seem like the collateralized debt obligations might create very little value. This is because of the fact that they just take one form of asset and repackage it. The entire process seems unnecessary and it may appear like it is only meant to create transaction costs and management fees. However, there are several advantages to collateralized debt obligations (CDOs) which attract people towards this instrument. They have been mentioned below:
Disadvantages of Collateralized Debt Obligations (CDOs)
Collateralized debt obligations (CDOs) have several well-documented disadvantages as well. They have been listed below:
Collateralized debt obligations have their own advantages and disadvantages. This is the reason why investors have a love-hate relationship with this financial instrument. However, there is no denying the fact that this instrument is very risky and that conservative investors should simply avoid using it.
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