Credit Crisis Dictionary

Want to know why this crisis is so hard for even the professionals to get their heads around:

Derivative- Financial contracts whose values are derived from value of an underlying asset. The underlying asset on which derivatives are based can be commodities, equities, residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or stock market indexes.

Collateralized Debt Obligation- An unregulated type of asset-backed security and structured credit product. Collateralized debt obligation are constructed from a portfolio of fixed-income assets.

Securitization- A structured finance process, which involves pooling and repackaging of cash flow producing financial assets into securities that are then sold to investors. All assets can be securitized so long as they are associated with cash flow.

Mortgage-Backed Security- An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. However not all securities backed by mortgages are considered mortgage-backed security. Housing Bonds (Mortgage Revenue Bonds) are backed by the mortgages which they fund, but aren't classified as mortgage-backed security.

Credit Default Swap- A credit derivative contract between two counterparties, whereby the buyer makes periodic payments to the seller in exchange for the right to a payoff if there is a default or credit event in respect of a third party or reference entity.