Collateralized Bond Obligation (CBO)

Written By
Paul Tracy
Updated November 4, 2020

What is a Collateralized Bond Obligation (CBO)?

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 Does a Collateralized Bond Obligation (CBO) Work?

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 Does a Collateralized Bond Obligation (CBO) Matter?

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

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Collateralized Bond Obligation (CBO).
Be the first to ask a question

If you have a question about Collateralized Bond Obligation (CBO), then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Collateralized Bond Obligation (CBO), then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Collateralized Bond Obligation (CBO)

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms