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.

A collateralized debt obligation (CDO) is also a fixed-income security that pays interest based on a bundle of underlying debt; but this pool can include a much bigger variety of loans and types of debts. CDOs are divided and sold to investors in tranches, reflecting their degree of risk.

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. Tom Nicholas and Matthew G.