Collateralized Debt Obligation
| Collateralized Debt Obligation - (CDO) is a complex financing mechanism supported by a pool of loans and other assets. A CDO is created when a financial institution, such as a bank, bundles together a group of loans and other assets and sells them to investors. The loans and assets are then divided into different classes, or tranches, with each class having a different risk level. The higher the risk, the higher the return. CDOs were first introduced in the 1980s, but gained popularity in the early 2000s. They were used to finance a variety of assets, including mortgages, credit card debt, and auto loans. CDOs became increasingly complex and risky in the lead up to the financial crisis of 2008. Many CDOs were created with subprime mortgages, which are loans made to borrowers with poor credit histories. These loans are more likely to default, which can lead to losses for investors. The financial crisis was caused in part by the collapse of the housing market, which led to widespread defaults on subprime mortgages. This, in turn, caused losses for investors in CDOs. As a result of the crisis, CDOs have fallen out of favor with investors and are no longer widely used. |
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