q & a

Do CDO investors focus too much on defaults and recovery data and not enough on loan prepayments? And why is it so important for investors to take prepayments into consideration?

There’s nothing wrong with paying attention to defaults or recoveries, and I might also add correlation—the degree to which a pool of loans has a reasonable degree of diversification. But the effect of different prepayment speeds shouldn’t be overlooked, especially when asset managers are having difficulties finding ‘goo

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