Investments, tenth edition

    13.   Collateralized debt obligations are used to reallocate the credit risk of a pool of loans. The pool 

is sliced into tranches, with each tranche assigned a different level of seniority in terms of its 

claims on the cash flows from the underlying loans. High seniority tranches are usually quite 

safe, with credit risk concentrated on the lower level tranches. Each tranche can be sold as a 

stand-alone  security.    

 SUMMARY 

   debt  securities  

  bond  

  par  value  

  face  value  

  coupon  rate  

  bond  indenture  

  zero-coupon  bonds  

  callable  bonds  

  convertible  bonds  

  put  bond  

  floating-rate  bonds  

  yield  to  maturity  

 KEY TERMS 

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7/17/13   3:51 PM

7/17/13   3:51 PM

Final PDF to printer

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480 

P A R T   I V

 Fixed-Income 

Securities

  current  yield  

  premium  bonds  

  discount  bonds  

  realized  compound  return  

  horizon  analysis  

  reinvestment  rate  risk  

  credit  risk  

  investment-grade  bonds  

  speculative-grade  or  junk 

bonds  

  sinking  fund  

  subordination  clauses  

  collateral  

  debenture  

  default  premium  

  credit default swap (CDS)  

  collateralized  debt  obligations 

(CDOs)   

 Price of a coupon bond:   

 Price

5 Coupon 3

1

r

 

B1 2

1

(1

1 r)

T

R 1 Par value 3

1

(1

1 r)

T

 

5 Coupon 3 Annuity factor(r, T) 1 Par value 3 PV factor(r, T)