Collateralized Debt Obligation (CDO)

Using a cash flow that the collateralized debt obligation structure pools, the CDO is an agreement to pay back investors in a predetermined progression. The pooled assets serve as collateral. The CDO is separated into slices, or “tranches”, which all have different amounts of risk associated with them. Senior tranches are safer because they have priority on collateral in case of default. These more senior tranches also have higher credit ratings and lower coupon rates.