Tranches refer to slices of CDO cash flows categorized based on risk. Higher-risk tranches are sold at higher prices, which reduces their return.

Question

Tranches refer to slices of CDO cash flows categorized based on risk.  Higher-risk tranches are sold at higher prices, which reduces their return.

Quizplus · Accepted Answer

Higher-risk tranches typically offer higher potential returns to compensate for the increased risk, not higher prices. Lower tranches are sold at a discount to attract investors for the higher risk they bear.

Tranches Refer to Slices of CDO Cash Flows Categorized Based