In constructing CDOs, the mortgage loans are sliced into tranches with the cash flowing first to the _____.

Question

Quizplus · Accepted Answer

In a CDO, the mortgage loans are sliced into tranches with the cash flowing first to the most senior tranche. This tranche has the highest priority in receiving payments and typically has the highest credit rating. The lower tranches (mezzanine, equity, etc.) receive cash flows only after the senior tranche has been satisfied, and thus carry higher risk and higher potential returns.

In Constructing CDOs, the Mortgage Loans Are Sliced into Tranches