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Collateralized debt obligation (CDO)

A form of structured security backed by a portfolio of secured or unsecured bonds or loans. CDOs are placed into different risk classes, or tranches, with the most senior class being the least risky. Interest and principal payments are met using income from the underlying bonds or loans and are made in order of seniority, so the most junior class of CDO have the highest risk of default. CDOs were at the heart of the 2008 financial crisis, at least partly, it has been argued, because credit rating agenda underestimated the risk involved.

Reference: Oxford Press Dictonary of Economics, 5th edt.