Collateralized Debt Obligations

This topic tests your understanding of how pools of debt are turned into securities with different risk characteristics, and how cash flows and credit risk are distributed across investors. In an investment banking interview, questions like this check whether you can connect the basic idea of collateral, securitization, and tranching to the way structured products are actually created and sold.

Interviewers ask about CDOs to see if you understand both the mechanics and the risk implications of packaging loans and other debt into tradable instruments. They also want to know whether you can distinguish related products such as CDOs and mortgage-backed securities, and explain why opacity and weak underwriting became important concerns in the financial crisis.