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CFA Question about CDO structure

Thread starter #1
What is the main benefit and the main drawback of increasing AAA issuance in a sequential pay structure? Thanks everyone.
 
#2
Hi @jsun124,

It depends on the perspective. Issuer vs investor.

In general, keeping everything else constant issuing more AAA CMOs for example would make the investors invested in the lower tranches worse off because the AAA-investors get their principal back first. Everything what remains from the principal is passed on to the lower tranches until no principal repayment is made and so on and so forth. So you can imagine that the higher the percentage of AAA-rated investors in the whole pool keeping everything else constant, the less likely it is that investors invested in lower tranches will get the (entire) principal back in case of default.

If there is no default then in case you increase the AAA tranche it will take longer for lower rated tranches to get their principal back.
 
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