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Collateralized Debt Obligation (CDO) Definition

What is a Collateralized Debt Obligation (CDO)?

A Brief Explanation of a Collateralized Debt Obligation (CDO)| Definition

A collateralized debt obligation, or CDO, is often referred to as an asset back security due to being tied to a pool of bonds, loans or other assets. A CDO contains different types of debt, each associated with different risk and return. The different types of debt are called tranches or slices and carry their own respective maturity date and risk. The higher the risk a CDO has, the higher the return. Fixed income assets are what derive a CDO’s value and payment. Collateralized debt obligations are often tied to the housing bubble which peaked in 2006 due to an increasing percentage of CDO’s being backed by sub-prime mortgages. As a growing number of the mortgages went into default, CDO’s fell dramatically in value, causing the failure of hedge funds like Bear Stearns in 2007.

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