Business and Personal Finance Dictionary

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• COLLATERALIZED BOND OBLIGATION (CBO)
  
  Definition: An ABS (q.v.) structure similar to a CMO (q.v.), but with a portfolio of bonds as collateral, instead of a portfolio of Mortgage Backed Securities (q.v.) and/or mortgage loans. A sponsor transfers the collateral into a Special Purpose Vehicle (SPV), such as a trust or corporation, which has no other assets and which issues claims. A typical CBO has more than one "tranche" or "tier", and a more junior tranche has more risk of default. Example: For example, a CBO might have senior, junior (or mezzanine), and subordinated (or equity) tranches. The senior tranche, like senior debt, has first claim on the collateral’s cash flows to cover its interest and principal payments. The junior tranche has second claim. The equity tranche claims the residual. Application: Junk bond money managers create CBOs to create highly rated bonds and highly speculative "equity" out of a portfolio of junk bonds. Pricing: Predicting default rates is the most difficult aspect of pricing these bonds. Risk Management: Comment: Agencies, such as Moody’s Investors Service and Standard and Poor’s Corp., assign credit ratings. Source: (Pimbley, Joseph. "LC: Evaluating Risk in Russian Roulette Notes and CBOs." DW, 7/17/95, p. 7.)
  
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