Collateralised Debt Obligation

A collateralized debt obligation or CDO is an asset-back security (ABS) which uses a portfolio of bonds or loans with varying levels of default risk as collateral. The portfolio is put together by a bank and sold in tranches according to their level of risk to investors through a special purpose vehicle (SPV). Higher risk tranches offer higher coupon payments. A number of holders of CDOs suffered large losses as a result of the U.S. subprime mortgage crisis of 2007.

See also: Synthetic CDO, Securitization, Credit Derivatives, Derivatives, TARP, Toxic Assets