Definition of CDO
Collateralised debt obligations. A kind of asset backed security and structured product. CDOs gain exposure to the credit of a portfolio of assets (such as mortgages) and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order - ie the equity tranche loses first and the AAA tranche loses last. The interest rate varies accordingly - with the AAA tranche carrying the lowest rate of interest.
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