Debt Securities

Innovative Debt Instruments and Bond Types

The financial services industry is noteworthy for relentless change. The pace of financial innovation can be relentless, especially in new product development and in product management.

Meanwhile, the industry also has drawn criticism, especially in recent years, for innovations whose full impacts were little understood at the times of their launch, sometimes with unexpected consequences many years down the road. Such is particularly the case with whole classes of new debt securities, debt instruments, ‚Äčand bond types.

Catastrophe Bonds

Catastrophe bonds are a new species of sovereign debt that act like debt securities until such time as a natural disaster strikes, then they essentially morph into casualty insurance policies that, in effect, pay the issuer. More

Collateralized Debt Obligation

A Collateralized Debt Obligation, or CDO, is a species of debt security that is backed by yet other debt instruments. Bonds built upon bonds, if you will. More

Collateralized Loan Obligation

The Collateralized Loan Obligation, or CLO, is a variation on the concept of the Collateralized Debt Obligation, or CDO. This time, however, the underlying assets are not publicly traded bonds.

Collateralized Mortgage Obligation

A Collateralized Mortgage Obligation, or CMO, is a form of Collateralized Loan Obligation, or CLO, that is built upon pools of mortgages, often home mortgages.

Covered Bonds

Covered Bonds have been common in Europe for a significant period of time, but only recently have begun to be issued in the United States. Though they have some superficial resemblance to a Collateralized Mortgage Obligation, or CMO, there is a crucial difference that dramatically reduces the risk to the holder. In fact, proponents of this bond type point how its structure leads to less risk and higher quality overall. More

Credit Default Swap

The Credit Default Swap, or CDS, is not a debt instrument per se. Rather, it is a variety of portfolio insurance. In the financial crisis of 2008, problems with pricing and valuing CDS contracts, as well with the ability of counter parties to meet their contractual obligations, were rife and exacerbated the economic crunch.

Deathbed Bonds

Deathbed Bonds are featured in various investment schemes that have drawn the attention of regulators. These schemes are utilized by speculators who try to take advantage of provisions in the bond covenants that are designed to make them more attractive to long-term individual investors. More

Junk Bond Finance

Junk Bond Finance, using high yield debt as a substitute for equity financing, became a hot topic in the 1980s, then fell into some disrepute, but still holds a significant place in the financial system. More

Mortgage Backed Security

A Mortgage Backed Security, or MBS, is a debt security backed by home mortgages. It is generally synonymous with Collateralized Mortgage Obligation, or CMO.

Real Estate Mortgage Investment Conduit

A Real Estate Mortgage Investment Conduit, or REMIC, is yet another synonym, generally speaking, for Collateralized Mortgage Obligation, or CMO, and Mortgage Backed Security, or MBS.


One of the core principals underlying Islamic finance is avoiding the payment or collecting of interest. To appeal to strict Muslim investors and savers, a variety of financial instruments have been created that serve the same purpose as bonds and other debt securities, but on which interest technically is not paid. Sukuk is a term referring to various types of quasi-debt securities that have been developed to meet the strictures of Islamic finance.


A variety of debt securities listed above are divided into what are called different tranches. These debt instruments include, for example:

  • Collateralized Debt Obligation, or CDO
  • Collateralized Loan Obligation, or CLO
  • Collateralized Mortgage Obligation, or CMO
  • Mortgage Backed Security, or MBS
  • Real Estate Mortgage Investment Conduit, or REMIC

Each tranche has different terms and conditions, and a different risk/return profile from its siblings derived from the same pool of underlying assets. Read on for more details.