What is a collateralized debt obligation?

Collateralized Debt Obligations (CDOs) are complex financial products that pool together various types of debt, such as mortgages, bonds, and loans, and then repackages them into tranches to be sold to investors. Each tranche has a different level of risk and return, allowing investors to choose according to their risk appetite. CDOs were widely used prior to the 2008 financial crisis and played a significant role in the buildup of risky lending practices. They are primarily managed by investment banks and financial institutions, and their value is derived from the performance of the underlying assets. Proper understanding of CDOs requires knowledge of structured finance and risk assessment.