Welcome to the major leagues of debt. Collateralized debt obligations, almost always referred to as a CDOs, are horrendously complicated deals that often leave anyone without a MBA wondering what was put into these CDOs.

The first thing to understand about bonds, (aka debt) is that bonds are often backed by something else. Think about your home mortgage. If you don't pay your mortgage, the bank can take the house. You end up homeless, and the bank sells the house to pay off the rest of that mortgage. There is something "backing" that mortgage; something lender can fall back on, if you don't pay your bills like a good human being. That's called collateral.

CDOs are one flavor of an entire sector of investing called structured finance, and they are also backed. CDOs, in the simplest concept, are just bonds backed by something else. In most cases, a CDO is backed by a collection of various types of debt. CDOs can be home mortgages, or other types of debt like credit cards, auto loans, and personal loans. Most of these types of debt are usually considered a bit more risky and they don't have the backing that a home loan does. So, if you think it through, you can imagine that CDOs are usually considered a risky investment.

To take a step further, understand that CDOs have multiple flavors within each CDO. These flavors are called tranches. If you've taken French, you might recognize the word, it means "slice" or "portion." Each slice of that CDO you invest in is a little different and carries different amounts of risk.

You could invest in the lowest risk tranche of the CDO, which would provide you lower risk. But, you don't get a good return on that investment. Or, you can be the heroic adventurer of bonds and invest in the lowest-grade tranche of the CDO. You'll make an amazing return, but if the economy even looks at you wrong, you might lose the entire investment.

CDOs aren¿t easy, and are almost always invested in by mutual funds, insurance companies and hedge funds. As an individual investor, you will probably not come across a CDO you can participate in.