What is Collateralized Bond Obligation?
A collateralized bond obligation is a bond understood to be of investment grade. The bond obligation is backed with the use of a pool of junk bonds, which are generally not considered to be investment grade. However, the combination of several junk bonds that represent different types of credit quality are often considered sufficient to provide the collateralized bond obligation the status of being considered an investment-grade bond. In most cases, the junk bonds that are utilized to back a collateralized bond obligation will be corporate bonds. The several different tiers in credit quality of the collection of bonds helps to provide an overall stability to the backing, since there is a good chance that most if not all of the bonds will maintain their worth for the duration of the bond issue. Because of the diversity of the backing instruments, a collateralized bond obligation can be an attractive option for an investor. Commonly referred to as a CBO, the collateralized bond obligatio
