What is a 'Synthetic CDO'
A synthetic CDO is a form of collateralized debt obligation (CDO) that invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets. Synthetic CDOs are typically divided into credit tranches based on the level of credit riskassumed. Initial investments into the CDO are made by the lower
tranches, while the senior tranches may not have to make an initial
investment.
All tranches will receive periodic payments based on the cash flows from the credit default swaps. If a credit event
occurs in the fixed income portfolio, the synthetic CDO and its
investors become responsible for the losses, starting from the lowest
rated tranches and working its way up.
Synthetic CDO Definition | Investopedia
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