A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period. A collateralized debt obligation is a type of derivative security because its price (at least notionally) depends on the price of some other asset.
Advantages of Collateralized Debt Obligations
-Collateralized debt obligations allow banks to reduce the amount of risk they hold on their balance sheet. The majority of banks are required to hold a certain proportion of their assets in reserve. This incentivizes the securitization and sale of assets, as holding assets in reserves is costly for the banks.
-Collateralized debt obligations allow banks to transform a relatively illiquid security (a single bond or loan) into a relatively liquid security.
Management site 