An investment collateralised by, or referenced to, a diverse portfolio of debt exposures in which the investor is exposed to losses above and below certain thresholds. The purpose of a CDO is to transform credit risk into investments with a particular risk-return profile, such as low-risk, triple-A-rated senior tranches and highly leveraged equity or junior tranches. In this way, CDOs channel greater investment into credit than would be the case with direct investment in corporate and sovereign debt securities. The main types of CDOs are cash CDOs and synthetic CDOs.

See also cashflow CDO and market value CDO.