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CLO Definition
Tuesday, October 8, 12:05 PM ET

In the world of finance, CLO stands for Collateralized Loan Obligation, and describes a type of special purpose vehicle that typically owns a portfolio of commercial loans.

Ownership of the vehicle is then carved into "tranches" where the senior-most tranche gets the best protection against loss. That protection translates into a safer investment profile than any of the individual loans in the CLO, often achieving a AAA rating and commanding a much lower interest rate than that of the individual loans within the CLO.

The bottom "tranches" are the first to see losses in the event any of the individual loans within the CLO default, but in exchange for that risk, those bottom tranches can earn a high return driven by the difference between the low interest cost paid to the senior tranche, and the higher rate of interest paid by the individual loans within the CLO.

For MarketNewsVideo.com, I'm Sayoko Murase.

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