CDOs are larger financial products that institutions then sell on a secondary market. Each CDO may include credit card debt, mortgages, auto loans and corporate debt. They are considered collateralized because borrowers have promised to repay the debt within each part of the CDO.

Investing in CDOs Typically, retail investors can't buy a CDO directly. Instead, they're purchased by insurance companies, banks, pension funds, investment managers, investment banks, and hedge funds. These institutions look to outperform the interest paid from bonds, such as Treasury yields.

While a traditional CDO generates income for the seller from cash assets like loans, credit cards, and mortgages, the value of a synthetic CDO comes from, for example, insurance premiums of credit default swaps paid for by investors.

In 2007, this market and other credit markets froze because of fears that many MBSs and CDOs contained mortgages that had been granted to subprime borrowers – that is, people with a poor credit-rating history who were unlikely to be able to repay the loans. Within a matter of weeks, Northern Rock was in deep trouble.