Investments, tenth edition

  Credit Risk and Collateralized Debt Obligations 

    Collateralized  debt  obligations,      or  CDO s, emerged in the last decade as a major mecha-

nism to reallocate credit risk in the fixed-income markets. To create a CDO, a financial 

institution, commonly a bank, first would establish a legally distinct entity to buy and later 

resell a portfolio of bonds or other loans. A common vehicle for this purpose was the so-

called Structured Investment Vehicle (SIV).  

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   An SIV raises funds, often by issuing short-

term commercial paper, and uses the proceeds to buy corporate bonds or other forms of debt