Collateralized Debt Obligations

Collateralized debt obligations (CDOs) are financial instruments made up of a pool of various types of debt, like loans or bonds. Investors buy shares of these pooled assets, receiving payments based on the underlying cash flows from the debts. CDOs are divided into different risk levels, with higher-risk portions offering higher potential returns. They played a significant role in the 2008 financial crisis, as many were backed by subprime mortgages, leading to widespread defaults and financial instability. Essentially, CDOs are a way to bundle debt and spread the risk among investors.