What Does Collateralized Debt Obligation – CDO Mean?
A CDO is an investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Investopedia explains Collateralized Debt Obligation – CDO Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as ‘tranches’ or ‘slices’. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. You’ve heard of, and, presumably, understand the phrase, “redistribution of wealth”. Well, a CDO is really nothing more than a redistribution of risk. For a quick run-down on the math of a CDO, (circa 2007), click here. For a similar 2007 view of CDOs, click here. CDOs and CDSs are actually individuals in a larger family known as “credit derivatives. Described in pla
