Flow Analysis and Stress Testing

The cash flow profile of a CDO depends on the following issues  

The frequency of defaults in the underlying asset pool and their severity, in terms of recovery rate, plus the impact of losses on investors principal 

The principal-repayment profile and expected amortization of the underlying loans 

The contingent payments under any credit-default swap used to transfer credit risk from the originator to another party, such as the SPV or an OECD bank. Under Basel I rules, if an investor takes out credit protection on a loan, and the protection is provided by a OECD bank, his capital charge changes from 100 percent to 20 percent. 

The contingent cash flows from any credit wrap or credit insurance on the underlying asset pool 

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