A collateralized debt obligation built solely on "junk" mortgages can still have a highest priority tranche that carries the highest quality rating available.

Question

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In a collateralized debt obligation (CDO), even if the underlying assets are considered "junk" or of low quality, the structuring of tranches allows for the highest priority tranche (senior tranche) to be rated highly. This is because the cash flows are directed to this tranche first, reducing its risk of default compared to lower-priority tranches.

A Collateralized Debt Obligation Built Solely on "Junk" Mortgages Can