Collateralized Debt Obligation

A Collateralized Debt Obligation (CDO) is a financial product that pools together various types of debt, like loans or bonds, and sells them as different tiers of investment. These tiers, or tranches, have varying risk levels and returns. Investors in higher-risk tranches might earn more but face greater losses if borrowers default, while those in safer tranches receive lower returns with less risk. CDOs allow investors to diversify their portfolios, but they gained notoriety during the 2008 financial crisis when many underlying loans turned bad, leading to substantial losses.