Investors may be understating CDO equity intrinsic value, says JP Morgan report

In a new research report, "Considering the 'contingent payoff'", JP Morgan researchers say that investors may be understating the intrinsic value of CLO equity if they ignore the possibility that performing loans bought at a discount today could some day be worth par. However, the report says that more than ever, equity valuation requires considering the call option, since purchasing loans below par creates a contingent opportunity based on prices at call or termination.