Definition: CDOs, or Collateralized Debt Obligations, are sophisticated financia l tools that banks use to repackage individual loans

into a product that can be sold to investors on the secondary market. These packages consist of auto loans, credit card debt, mortgages or corporate debt. They are called collateralized b ecause the promised repayment of the loans are the collateral that gives the CDO s value. CDOs are a special type of derivative. Like its name implies, a derivative are a ny kind of financial product that derives its value from another underlying asse t. Derivatives, such as put options, call options and futures contracts, have lo ng been used in the stock and commodities markets. CDOs are called asset-backed commercial paper if the package consists of corpora te debt, and mortgage-backed securities if the loans are mortgages. If the mortg ages are made to those with a less than prime credit history, they are called su bprime mortgages. Banks sold CDOs to investors for three reasons: 1. The funds they received gave them more cash to make new loans. 2. It moved the loan's risk of defaulting from the bank to the investors. 3. CDOs gave banks new and more profitable product to sell, which boosted share prices and managers' bonuses. -----------------------------PRINCIPLES OF BANK LENDING POLICIES--------------The main business of banking company is to grant loans and advances to traders a s well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lendin g. So the banks follow certain principles to minimize the risk: 1. Safety 2. Liquidity 3. Profitability 4. Purpose of loan 5. Principle of diversification of risks SAFETY:Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor s money. The purpose behind the safety is to see the financial position of the borrower w hether he can pay the debt as well as interest easily. LIQUIDITY:-

It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or prod uctive capital. Such type of lending is recovered on demand. PROFITABILITY:Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest t o the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to c ustomer. PURPOSE OF LOAN:-

Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty o f recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purpo ses. PRINCIPLE OF DIVERSIFICATION OF RISKS:While lending loans or advances the banks normally keep such securities and asse ts as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefit s from the lending to another states units. Thus, he effect on the entire business of banking is reduced. There are proverbs that do not keep all the eggs in one basket.