A Collateralised Debt Obligation or CDO is a method of securitising a portfolio of loans or "debt obligations", by transferring the portfolio to a special purpose vehicle, whose liabilities are collateralized by the portfolio. CDOs fall into two main classes: cash CDO's and synthetic CDO's.
Cash CDO. This is a form of Collateralised Debt Obligation in which the assets (the portfolio of loans or "debt obligations") have been acquired for cash.
Synthetic CDO. A form of Collateralised Debt Obligation in which the assets (the portfolio of loans or "debt obligations") have been acquired by selling protection rather than for cash. The cash raised is thus limited to expected and unexpected losses in the portfolio of synthetic assets.
