CDO (Collateralized Debt Obligation)

A Collateralized Debt Obligation (CDO) is a financial product that pools together various debt instruments, like loans and bonds, and repackages them into different investment categories. Investors buy these categories based on their risk appetite, with some receiving higher returns but more risk if borrowers default. CDOs are structured so that cash flows from the underlying debts are distributed to investors in a prioritized manner. They gained notoriety during the 2008 financial crisis when defaults rose, revealing the risks associated with complex financial products tied to subprime mortgages. Essentially, CDOs are investment vehicles that can amplify both gains and losses.