Question

what is the difference between a Mortgage Backed Security and a Collateralized Debt Obligation? Explain with reference to the source of the funds from which investors will be repaid.

Answer 1

There are some slight differences with mortgage backed securities and collateralized debt obligation. Both are almost similar. But now we can discuss about the differences between mortgage backed securities and collaterized debt obligation. Before that we can explain what these two terms represents.

Mortgage backed security

  A mortgage-backed security is a type of asset-backed security which is secured by mortgage. The mortgages are combine together and sold to a group of individuals that are securitized the loans together into a security that investors can buy. Then the investors can buy these securities. This is how this tramsaction works.

collateralized debt obligation

A collateralized debt obligation is a collection of pooled assets that generate income, such as mortgages or corporate bonds, etc. The assets are pooled together and divided into different bunches to be sold to investor. Here the assets are pooled for reducing the risk. So pooled asset will have less risk and they sold this to the investor. This is the process of collaterized debt onligation.

So when we are discussing the differences we can find some differences between these two.

In collateralized debt obligation include mortgage and other type of assets. In both the owner of such a product makes money, directly or indirectly, from the repayment of principal and interest by the pool of consumers.Collateralized loan obligations (CLOs) are CDOs made up of bank loans. Actually these are two financial instrument but showing many similiar characteristics and sometimes its overlap others. The main difference is CDS are much broader and include different kind of assets which are pooled together. But a mortgage backed security is like a bond based investment and these are just like the home loans. So not all mortgage-backed securities are collateralized debt obligations.

If you choose a mortgage then yous should repay the money. Then there is a need to pay back the capital and the interest together. With an interest-only mortgage we only need to pay back the interest on a monthly basis initially and repay the capital at the end of the mortgage term. Investors should get repaid for their investment. For repaying this company have many sources of funds.  Sources of funding include credit, venture capital, donations, grants, savings, subsidies etc. So these sources will use for the purpose of repaying.

ThankYou.....