26 Sep 2014

Word on the Street - Collateralized debt obligation (CDO)

A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation (CDO) is so-called because the pooled assets – such as mortgages, bonds and loans – are essentially debt obligations that serve as collateral for the CDO. The tranches in a CDO vary substantially in their risk profile. The senior tranches are relatively safer because they have first priority on the collateral in the event of default. As a result, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior tranches, which offer higher coupon rates to compensate for their higher default risk.

Source - http://www.investopedia.com/terms/c/cdo.asp

Read more about how CDO's Lead to the Subprime Crisis in 2008 at:  http://bonds.about.com/od/derivativesandexotics/a/CDO.htm

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