Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

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

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