Collateralized Debt Obligation - CDO

An asset-backed security is a tradable financial instrument where the value is secured by some underlying asset. A collateralized debt obligation represents a type of these. The asset involved in a CDO is a debt instrument.

The most famous kind of CDO is a mortgage-backed security. The debt obligation here comes from home mortgages. These tradable bundles of mortgages ultimately played a central role in financial crisis of 2007-2008.

Generally, a CDO is set up by packaging a bunch of related debt instruments together. In the case of mortgage-backed securities, the setup involves pooling a bunch of home mortgages with similar terms and similar types of borrowers. Other types of CDO involve other types of instruments...things like loans or bonds. These debt obligations serve as the collateral for the CDO.