Collateralized debt obligation (CDO)

Principles of Finance Glossary

A structured security issued by a special-purpose vehicle that owns a pool of debt instruments (corporate bonds, loans, ABS, MBS) and pays investors via a waterfall through senior (AAA), mezzanine (BBB), and equity (unrated, first-loss) tranches. Credit enhancement via overcollateralization and excess spread absorbs early defaults before they reach rated tranches.

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