Which of the following is true regarding a collateralized debt obligation (CDO)?

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A CDO is a security that represents a claim on the cash flows generated by a pool of underlying loans or debt instruments. These cash flows are divided into different tranches based on their level of risk, with senior tranches having priority over junior tranches. The collateral backing a CDO can include a variety of underlying assets, such as corporate bonds, mortgages, or auto loans. However, unlike a credit default swap (Choice C), a CDO does not necessarily involve any kind of insurance against default. Additionally, while some securities may be tax free (Choice B), this is not a defining characteristic of a CDO. Finally, since a CDO represents a claim on the cash flows generated by a pool of loans, it inherently carries some degree of default risk (Choice A is false).

Which of the Following Is True Regarding a Collateralized Debt