collateralized bond obligation (CBO)

Debt financing mechanism that converts junk grade bonds into an investment grade asset based security (ABS). In this arrangement, a bank's portfolio of low-rated bonds (as the underlying collateral for an issue of CBO) is transferred to a specially created corporation or trust (called special purpose vehicle or CPV) which has no other assets and manages the issue. Typically, a CBO is issued at two or more levels (called tiers or tranches) with different degrees of risk and rates of interest.