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Cash Flow CDO

A cash CDO in which the underlying collateral pool generates sufficient cash flows to pay the stated coupon and principal obligations of the different tranches. In case there are default-related losses and credit impairments, the CDO structure may require that senior tranches are amortized at the expense of junior tranches. In other words, the collateral is a self-amortizing pool of high-yield bonds or secured loans (bank loans), which are typically not traded unless specific credit triggers are activated. Therefore, a cash flow CDO manager should pay special attention to the assets in the collateral pool that minimize defaults and maximize the cash flows (coupon returns).


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