Collateralized Debt Obligations (CDOs) are financial instruments that are backed by a pool of loans and other debt assets. Investors in CDOs receive payments from the cash flows of the underlying assets. CDOs are typically divided into different tranches, each with varying degrees of risk and return. Investors can select tranches based on their risk tolerance, with senior tranches carrying lower risk and lower returns compared to junior tranches which bear higher risk but offer potentially higher returns.