Collateralized Bond Obligation (CBO)

What it is:

A collateralized bond obligation (CBO) is a bond that uses a variety of high-yield junk bonds as collateral. These bonds are separated, or pooled, into tranches with higher and lower levels of risk.

How it works/Example:

Junk bonds in and of themselves are considered high-risk due to their very low ratings. However, high-risk bonds offer high-interest yield as compensation to the buyer. In a CBO, the junk bonds comprising the collateral are purposely chosen in such a way that they offer diversification. This lowers the overall risk of the CBO while still offering the potential for high yields inherent in most junk bonds. Similar to collateralized loan obligations (CLOs) and distressed collateralized mortgage obligation mortgage obligations (CMOs), CBOs are issued in tranches that offer investors graduated levels of risk and return.

Why it Matters:

CBOs offer fixed-income investors the opportunity to benefit from the high-yield potential of junk bonds with a lower degree of risk via diversification

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.