What is Collateralized Debt Obligation (CDO)?

A collateralized debt obligation (CDO) is a complex financial product that is typically backed by a pool of loans and different types of assets that are sold to institutional investors. CDOs are a specific type of derivative whose value is derived from other underlying assets, which become collateral if the initial loan defaults. CDOs can be risky in their own right, but are a practical tool for freeing up capital and reducing risk for investors.