Severity of default is key

For investors to feel comfortable with investing in CDOs they must feel confident about thecircumstances under which they will win and lose. Here the recovery rate of the underlying assets is thekey to performance

For investors in the CDO market, it is important to distinguish between default and recovery rates. A default is defined as occurring at the moment that a promised payment on a bond is missed by the issuer, or the time at which an announcement of a missed payment is made regardless of the allowable grace period. For example, the way that Moody’s rates bonds means: “If issuer ABC misses an interest payment on the due date but makes the payment during the grace period, Moody’s treats ABC as a