Collateralized Debt Obligation with Example

What is Collateralised Debt Obligation?

Collateralised Debt Obligation (CDO) is a structured product that banks can use to unburden themselves of credit risk. These financial assets are repacked loans sold to investors on the secondary markets. CDO could include some combination of asset-backed securities (ABSs), including mortgages (commercial or residential), auto loans, credit card debt, or some other loan product.

Example of Collateralised Debt Obligation

CDO can technically take many forms based on the underlying. When a CDO consists only of mortgage loans, it is technically known as a collateralised mortgage obligation (CMO).

Why is it important to know CDO?

For Risk Professionals, CDO is a core product that should be understood. CDOs is considered one of the products that played a part in the Financial Crisis of 2008-2009, as stakeholders could not understand the complexity of the product and assumed more risk than required.