CDO

CDO

See: Collateralized Debt Obligation.

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CDO

See collateralized debt obligation.

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Collateralized Debt Obligation

An asset-backed security backed by the receivables on loans, bonds, or other debt. Banks package and sell their receivables on debt to investors in order to reduce the risk of loss due to default. Returns on CDOs are paid in tranches; that is, the individual loans backing each CDO have different levels of risk, and investors are paid out according to the level of risk they have acquired. Banks offer higher interest rates to investors willing to buy CDOs backed by higher-risk loans. From a bank's perspective, in addition to reducing risk, CDOs also reduce their capital requirements because they can raise funds through the issue of CDOs. While, theoretically, CDOs can be backed by mortgages, one usually refers to these as collateralized mortgage obligations.

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Collateralized Debt Obligation (CDO)

What Does Collateralized Debt Obligation (CDO) Mean?

An investment-grade security that is backed by a pool of bonds, loans, and other assets. CDOs represent various debt obligations but are often nonmortgage loans or bonds.

Investopedia explains Collateralized Debt Obligation (CDO)

Similar in structure to a collateralized mortgage obligation (CMO) or a 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 often are referred to as tranches or slices. Each slice has a different maturity and risk associated with it. The higher the risk is, the more the CDO pays.

Related Terms:
• Asset-Backed Security
• Bond
• Collateralized Mortgage Obligation—CMO
• Debt
• Tranches