Collateralized debt obligations (CDOs) are financial instruments backed by a pool of debt obligations, such as bonds, loans, and other types of debt. They are often structured into different tranches, each with different levels of seniority and risk. The most senior tranches are typically considered the safest and offer the lowest returns, while the most junior tranches are considered the riskiest and offer the highest returns.
CDOs can be used by investors to diversify their portfolios and potentially increase their returns. They can also be used by companies to raise capital by selling off pools of debt obligations. However, CDOs can also be complex and risky investments, and they were a major contributing factor to the 2008 financial crisis.