Sunday, June 17, 2007

Rating of assets backing financial products

I saw an advertisement that a specific financial product is backed by CDO (collaterialised debt obligations) with at least a rating of AA.

Normally, a AA rating is considered to be strong, in the case of a rated bond or a corporte entity.

I learned that AA rating for a CDO follows a different set of criteria. The AA rating for a CDO is weaker than for a bond. It does not have the same level of financial strength.

If you read a financial product that is backed by AA rated CDO, you have to be aware that it is of lower quality than a AA rated bond.

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