Collateralised bond obligation

A collateralised bond obligation (CBO) is an asset backed security backed by holdings of bonds. It is a way of pooling different bonds, with varying risks, to create a single, more diversified bond (or bond-like instrument).

The CDO (espeically its senior obligations) should have a higher credit rating than is typical of the bonds it holds, but this does not necessarilly mean that it is worth more: the diversifiability of part of the risk should be reflected in the market price and creating safe senior tranches increases the risk of lower tranches. Furthermore, given the greater difficulty of valuing a CDO (compared to individual bonds) the advantages of thisstructure are dubious.

 For more detail see CDO

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