Collateralized Debt Obligation (CDO) Definition - Glossary

Collateralized Debt Obligation (CDO) is a financial instrument pooling various loans, sold as tranches to investors, with varying risk levels.

Collateralized Debt Obligation (CDO) is a complex financial product that aggregates loans like mortgages, bonds, or other debt instruments. These are pooled together and divided into tranches with distinct risk and return profiles. Each tranche offers different levels of risk and reward, tailored for diverse investor preferences. CDOs are designed to redistribute risk and provide liquidity. They gained notoriety during the 2008 financial crisis due to their role in amplifying systemic risk. Investors receive payments based on the cash flow from the underlying loans, while the CDO's structure determines risk exposure.