Collateralized Loan Obligation - CLO

AAA

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. 

INVESTOPEDIA EXPLAINS '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.

 
RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  3. Synthetic CDO

    A form of collateralized debt obligation (CDO) that invests in ...
  4. Structured Finance

    A service that generally involves highly complex financial transactions ...
  5. Tranches

    A piece, portion or slice of a deal or structured financing. ...
  6. Securitization

    The process through which an issuer creates a financial instrument ...
RELATED FAQS
  1. How did moral hazard contribute to the financial crisis of 2008?

    The financial crisis of 2008 was the result of a wide range of contributing factors. One significant factor leading up to ... Read Full Answer >>
  2. Which securities are considered investment grade?

    In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they ... Read Full Answer >>
  3. What is the difference between an Equity REIT and a Mortgage REIT?

    There are several types of real estate investments trusts (REITS) that investors can purchase, including equity REITS and ... Read Full Answer >>
  4. When should a company consider issuing a corporate bond vs. issuing stock?

    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  5. What kinds of derivatives are types of forward commitments?

    A derivative is a type of security in which the price of the security is dependent on underlying assets. A derivative could ... Read Full Answer >>
  6. What are some popular ETFs that track the industrial sector?

    As of April 2015, some of the most popular and best performing exchange-traded funds (ETFs) that track the industrial sector ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving your optimal asset allocation.
  2. Investing Basics

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  3. Mutual Funds & ETFs

    Floating-Rate Mutual Funds: Rewards And Risks

    In an economy with low interest rates, investors need to get creative in order to reap high returns.
  4. Investing Basics

    Explaining Banker's Acceptances

    A banker’s acceptance (BA) is a way for two unfamiliar parties to transact business on credit.
  5. Bonds & Fixed Income

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  6. Professionals

    Alternatives Need More Education, Not Enforcement

    While disclosures and investor education need improvement, alternatives provide a valuable way to increase yield and hedge against declines.
  7. Bonds & Fixed Income

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  8. Professionals

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  9. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  10. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center