What is a collateralized loan obligation (CLO)?

A collateralized loan obligation (CLO) is characterized as a type of structured credit product that is backed by a diversified pool of loans, typically corporate loans. CLOs are created by pooling together various loans, such as leveraged loans made to businesses, and then issuing securities that represent interest in that pool. This structured product allows investors to receive payments based on the cash flows generated by the underlying loans while also utilizing a further separation of risk through tranching.

In a CLO, the loans are actively managed, meaning the manager can buy and sell loans in order to optimize the performance of the investment. Investors in CLO securities take on varying degrees of risk depending on the tranche they purchase, with more senior tranches offering lower yields but greater security, and subordinate tranches providing higher yields with increased risk. The well-structured nature and management of risks make CLOs appealing to institutional investors seeking enhanced returns.

The other options describe financial instruments that do not encapsulate the unique characteristics of CLOs. For example, fixed income securities can encompass a broad range of debt instruments, but they don't specifically denote the structured nature of a CLO backed by loans. Stock options are derivative contracts providing the right to buy or sell shares of stock, which is unrelated to loan