Market value CDO

By contrast with a cashflow CDO, a market value CDO is one in which the market value of the collateral is frequently measured. Whereas in a cashflow CDO, the overcollateralisation test is based on the ratio of the par value of assets to the size of the liabilities, in a market value CDO, the test is based on the ratio of the market value of the collateral to the size of the liabilities. Market value CDO portfolios are typically traded much more actively than those of cashflow CDOs. There are fewer explicit restrictions on the manager's ability to invest in certain assets. However, each type of investment carries a different weighting in calculating the overcollateralisation ratio. This weighting, known as the discount factor, is based on the asset's liquidity. As a result of these more flexible guidelines, market value CDOs tend to be used to carry out a broader range of investment strategies than cashflow CDOs.