Mortgage-backed securities (MBS) and collateralized debt obligations (CDO) are both types of bond investments. While they may seem similar, there are important differences between the two that investors should be aware of before making any decisions. In this article, we’ll take a closer look at those differences and help you decide which one is right for you.
What is MBS?
MBS is a type of asset-backed security that is secured by a mortgage or collection of mortgages. MBS are created when a lender bundles together a group of home loans and sells them as single security to investors on the secondary market. Although MBS is often referred to as “mortgage-backed bonds,” they are not bonds in the traditional sense because they do not make periodic interest payments. Instead, MBS receive periodic payments of interest and principal from the underlying pool of mortgages, which pass through to the MBS holders. MBS can be either agency MBS or non-agency MBS. Agency MBS are issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, while non-agency MBS are issued by private institutions.
What is CDO?
CDO is short for collateralized debt obligations. A CDO is a type of investment that is backed by a pool of assets, such as loans or bonds. The CDO is then sold to investors in the form of bonds. The income from the underlying assets is used to pay interest and principal to the bondholders. CDOs are typically used to generate higher returns than other types of investments, but they also carry more risk. If the value of the underlying assets decreases, the value of the CDO will also decline. For this reason, CDOs are sometimes referred to as “junk bonds.” While they may be high-risk investments, CDOs can still provide investors with the potential for high returns.
Difference Between MBS and CDO
MBS and CDO are both types of securities that are backed by a pool of assets. MBS are typically backed by mortgages, while CDOs are backed by a variety of debt instruments. Both MBS and CDOs are created through the securitization process, which involves pooling together a group of loans and then selling the resulting security to investors. MBS tend to be less complex than CDOs, and they usually have a higher credit rating. However, MBS may also offer a higher return than CDOs. Ultimately, MBS and CDOs both offer investors a way to diversify their portfolios and earn a return on their investment.
Conclusion
The difference between an MBS and CDO is that a CDO is backed by mortgages, while an MBS is not. This means that if the holder of a CDO goes into foreclosure, the CDO will still be paid off before any other investors in the security. Investors in an MBS are more at risk because there is no underlying mortgage asset to fall back on if homeowners stop making payments. Because of this added risk, investors demand a higher yield for investing in an MBS.
