A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period.

Concept. CDOs vary in structure and underlying assets, but the basic principle is the same. A CDO is a type of asset-backed security. To create a CDO, a corporate entity is constructed to hold assets as collateral backing packages of cash flows which are sold to investors.

A collateralized loan obligation (CLO) is a securitization product created to acquire and manage a pool of leveraged loans. CLOs issue multiple debt tranches along with equity and use the proceeds from the issuance to obtain a diverse pool of syndicated bank loans.

Collateralized debt obligations (CDOs), the bad boys of the financial crisis of 2008, are coming back. CDOs are securities that hold different types of debt, such as mortgage-backed securities and corporate bonds, which are then sliced into varying levels of risk and sold to investors.