Collateralized Debt Obligation
Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand. CDOs' value and payments are derived from a portfolio of fixed-income underlying assets. CDO securities are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.
Read more about Collateralized Debt Obligation: Summary, Creation of CDOs, Market History and Growth, Concept, Structures, Taxation of CDOs, Types of CDOs, Types of Collateral, Transaction Participants, Subprime Mortgage Crisis
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