Notesglobalcrisis

* Credit Crisis

the effect of the frozen credit market as a result of the aftermath of Wall Street making it easier for buyers to get loans through innovative ways of bundling Sub-prime mortgages, called collateralized debt obligation (CDO), and investors playing a game of leverage to purchase the those bundles.

* What is a Frozen Credit Market

when Financial Institutions have become overly conservative and are not willing to easily part with money. This means credit is very hard to get, even for people with terrific credit histories. In other words, Someone with a triple A credit rating may be unable to get a mortgage or open a home-equity line of credit.

* Leverage

borrowing money to pay for the purchase of assets.

* Sub-prime mortgage

a type of loan granted to people who, as a result of their poor credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate. — Higher risk = higher returns.

* CDO

an acronym for collateralized debt obligations, an investment security that has the backing of a pool of bonds, loans, and other assets. CDOs are 'slices' of different types of debt where each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. The least risky of the slices receive a credit default swap.

* Credit Default Swap

a kind of insurance attached to the least risky slice of a CDO bundle. The owner is entitled to the par value of a bond by the seller of the swap if there's ever a default in the bond coupon payments.