A securitisation of a pool of debt, such as bonds or loans, into tranches of differing seniority. Its risk depends heavily on the correlation of the underlying defaults.
Where you will meet it
Collateralised debt obligation comes up in 7 learning outcome notes across the FRM syllabus.
A few of them:
Anatomy of the Great Financial Crisis of 2007-2009 FRM Part I · Foundations of risk management
“A CDO repeats the process, and the pool's losses are absorbed first by the equity tranche, then mezzanine, then senior tranches.”
Credit Derivatives FRM Part II · Credit risk measurement and management
“A collateralized debt obligation (CDO) slices portfolio losses into tranches, equity first, then mezzanine, then senior.”
Correlation Basics: Definitions, Applications, and Terminology FRM Part II · Market risk measurement and management
“It also drives CDO tranche values, first-to-default baskets and wrong-way risk, where exposure to a counterparty grows as its credit quality falls.”
Case Study: Investor Protection and Compliance Risks in Investment Activities FRM Part II · Operational risk and resilience
“Undisclosed conflicts of interest, as in the SEC case over the Abacus CDO, show that omitting a material fact from a sale is itself a breach, even when every statement made is true.”
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