A securitized product (a type of collateralized debt obligations – CDOs) that originates obligations collateralized or backed by a pool of bonds, loans, or other fixed income instruments. The collateral consists of leveraged loans, high-yield bonds, junior tranches of asset-backed commercial paper (ABCP) or mortgage-backed securities or junior tranches of other CDOs. Arbitrage CDOs accumulate assets from the proceeds of obligation issuance in order to encash the credit spread differential between the high-yield securities that form the collateral (the rate of return on the assets acquired by the CDO) and the low-yield liabilities represented by the rated CDO securities (the funding cost of the liabilities issued by the CDO).

Arbitrage CDOs are usually issued by investment banks, investment management boutiques, asset and portfolio managers, insurance companies, and other similar entities.