Background Traditional financing schemes in firms include the issuance of stock, bonds, and the use of retained earnings. Through these mechanisms, companies have managed to boost their financial capabilities and eventually continue their planned expansions. Although these financing schemes remain as the logical options for firms, changes in the business environment have pointed to various alterations. As firms evolve, several of their assets and liabilities have useful tools in offsetting the financial incapacities of companies. Indeed, these valuable components gradually turned into valuable parts of corporate financing. The development of collateralized debt obligations and credit derivatives is motivated by the growing risk associated with conventional methods of financing. The issuance of stocks has decreased because of ownership issues and other regulatory barriers. Bonds, on the other hand, have proven to become risky in the long term. In addition, retained earnings are hard to realize given the competitive markets today. All these scenarios suggest that ways have to be done in order to make firms independent from these financing mechanisms. It is undeniable that collateralized debt obligations and credit derivatives have developed significantly. But these are situations wherein credit has been misevaluated. The imbalanced assessment of credit poses both positive and negative effects. Basically, the succeeding discussions will focus on connecting such misjudgment to the economy. Both advantages and drawbacks of such practice will be comprehensively touched. As vital as firms are to the economy, these financial instruments also play important roles. Collateralized Debt Obligation Collateralized Debt Obligation (CDO) is asset-backed security and structured credit product. A CDO acquires exposure to the credit of a portfolio of fixed income assets and divides the credit risks among various tranches. These tranches include senior tranches, mezzanine tranches, and equity tranches. The losses are determined through reverse order of seniority so that junior tranches provide higher coupons to compensate for the augmented risks. Moreover, the development of CDO technology has transformed these high-risk tranches into seemingly low-risk senior debt (Schorin and Weinreich, 1998). A CDO cash flow structure distributes interest income and principal repayments from a collateral pool of debt instruments to a prioritized set of CDO securities. In addition, a cash-flow CDO indicates that the collateral portfolios are not allowed to be publicly traded (Duffie and Garleanu, 2001). The rationale of this CDO attribute is supported by the uncertainty related to interests and principal repayments to the CDO tranches, which are purely determined by the number and timing of defaults of the collateral securities. Market value CDO will necessitate equity more than cash flow CDO. In order for the trading to commence, the capital structure of the market value CDO has to include a significant revolving credit facility to allow collateral managers to efficiently monitor the capital of the CDO and to trade the CDO hassle-free. Another important aspect that has to be recognized pertains to the legal requirements related to CDO securitization. The US government for instance has drafted several re