What is a Collateralized Debt Obligation?
A collateralized debt obligation is any investment that is backed by a collection of several different assets. Often, this collection of backing assets will include bonds or bank loans that are not classified as mortgages. This arrangement does create a higher degree of risk for the investor, as there is the chance of default on the loans backing the investment. In return for assuming this higher risk, the investor stands a chance of realizing a higher rate of return on the investment. The collateralized debt obligation, or CDO, is considered to be an investment-grade security. With this type of security, there is some type of debt or equity present. The debt of equity is backed by a stable organization that is considered solvent and reputable. An investor is willing to assume the higher risk associated with the debt or equity in anticipation of receiving compensation as the debt is repaid. CDOs typically do not use a single type of debt as the backing for the obligation. Instead, ther
A collateralized debt obligation (CDO) is the security created when Wall Street pools loans, mortgages or bonds, and sells off the rights to the cash flow from the pool to investors. These investment vehicles also sometimes are referred to as CLOs (collateralized loan obligations), CBOs (collateralized bond obligations) or CMOs (collateralized mortgage obligations), depending on the type of underlying debt instruments that are being pooled and securitized.
