Collateralized Loan Obligation - CLO

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DEFINITION of 'Collateralized Loan Obligation - CLO'

A security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations (CLOs) are similar to collateralized mortgage obligations, except for the different type of underlying loan.

BREAKING DOWN 'Collateralized Loan Obligation - CLO'

In a CLO, the investor receives scheduled debt payments from the underlying loans but assumes most of the risk in the event that borrowers default. The securities offer the investor greater diversity and the potential for higher-than-average returns. Typically, banks sell CLOs with various tranches, or slices, that reflect different levels of seniority to match different risk/reward profiles.

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