A:

Although individuals involved in the private banking industry may buy into collateralized debt obligations, or CDOs, they are rarely sold to individuals who are private investors alone, and these individuals rarely profit from such opportunities. Instead, CDOs are sold to investment banks, insurance companies, investment managers, hedge funds and pension funds.

During a financially healthy economy, CDOs do well, outperforming Treasury yields and resulting in higher returns. However, the opposite is true during economic down times, and the risk involved with CDOs does not always pay off. A CDO is a group of loans for individuals that is packaged and sold to these institutional buyers. Examples of these loans include credit card debt, auto loans and mortgages.

Collections of CDOs are divided into risk rate and yield returns accordingly. They may consist of prime loans or subprime loans, and even loans with risks somewhere in the middle. CDOs generate business for banks by giving them cash to create more loans, taking the burden of a default loan from the bank to the investor and adding to the bank's list of products available. This leads to more favorable share prices, and ultimately, to more money for the bank and its stockholders.

Until recently, CDOs were very popular for several years in the banking industry. A financial downfall resulted in the Federal Reserve and Department of the Treasury buying many CDOs in an attempt to restore financial stability in the United States. While economic conditions may make CDOs more or less popular, depending on the times, there are likely to be organizations willing to package and sell them.

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