what is a synthetic cdo 
a synthetic cdo is a type of collateralized debt obligation cdo that invests in noncash assets that can offer extremely high yields to investors however they differ from traditional cdos which typically invest in regular debt products such as bonds mortgages and loans in that they generate income by investing in noncash derivatives such as credit default swaps cdss options and other contracts synthetic cdos are typically divided into credit tranches based on the level of credit risk assumed by the investor 9the bottom linea collateralized debt obligation cdo is a structured finance product that is backed by a pool of loans and other assets it can be held by a financial institution and sold to investors the tranches of a cdo tell investors what level of risk they are taking on with senior having the highest credit rating then mezzanine then junior in the case of a default on the underlying loan senior bondholders are paid from the pool of collateral assets first and junior bondholders last during the housing bubble in the early 2000s cdos held huge bundles of subprime mortgages when the housing bubble burst and subprime borrowers went into default at high rates the cdo market went into a meltdown this caused many investment banks to either go bankrupt or be bailed out by the government despite this cdos are still in use by investment banks today 