A single-name CDS references only one security and the credit risk to be transferred in the swap may be very large. In contrast, a synthetic CDO references a portfolio of securities and is sliced into various tranches of risk, with progressively higher levels of risk.

CDO: An Overview. An asset-backed security (ABS) is a type of investment that is backed by a pool of debt, such as auto loans or home equity loans. 1 A collateralized debt obligation (CDO) is a version of an ABS that may include mortgages as well as other types of assets.

MBS, as their name implies, are made up of mortgages—home loans bought from the banks that issued them. In contrast, CDOs are much broader: They may contain corporate loans, auto loans, home equity loans, credit card receivables, royalties, leases, and, yes, mortgages.

While the underlying assets of regular CDOs are traditional fixed-income assets, such as loans, mortgages, and bonds, synthetic CDOs use non-cash assets as the underlying asset, such as credit default swaps, options, and other such contracts. Synthetic CDOs typically offer higher yields than traditional CDOs.