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.

When the housing bubble burst and subprime borrowers went into default at high rates, the CDO market went into a meltdown. This caused many investment banks to either go bankrupt or be bailed out by the government. Despite this, CDOs are still in use by investment banks today.

Collateralized debt obligations (CDOs) are a type of structured investment finance product that contain various assets and loan products. Investment banks package bank loans, mortgages, and other assets into collateralized debt obligations—similar to funds—for institutional investors to buy.

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.