CDO
Collateralized Debt Obligation
A structured finance product backed by a diversified pool of debt instruments and divided into risk tranches.
CDOs pool various debt instruments like bonds, loans, or mortgages into a special purpose vehicle that issues securities with different risk and return characteristics. Senior tranches receive priority in payment distributions and carry lower risk/return, while junior tranches absorb first losses but offer higher potential returns. CDOs enable risk redistribution and provide funding for underlying debt markets. They became controversial during the 2008 crisis when mortgage-backed CDOs experienced massive losses. Synthetic CDOs use credit default swaps rather than owning actual debt instruments. Modern CDOs include collateralized loan obligations (CLOs) backed by leveraged loans and require enhanced regulatory oversight and transparency.
Example
CLO backed by leveraged corporate loans, commercial mortgage CDO