The value of a CDO (collateralized debt obligation)unambiguously increases when
A)The correlation of default amongst the names in the CDO decreases.
B)The correlation of default amongst the names in the CDO increases.
C)The intensity of default of names in the portfolio decreases.
D)The number of names in the CDO decreases.

Question

Quizplus · Accepted Answer

How changes in the correlation of default impact any tranche of a CDO depends on what tranche it is,i.e. ,equity,mezzanine,or senior.Hence,it is not possible,without knowing the specific details of a tranche,to be able to say whether its value increases or decreases when correlation amongst the names in the portfolio increases or decreases.But,if the default risk of all names in the portfolio declines,all tranches will gain in value.As the number of names in the portfolio decreases,diversification in the portfolio is lowered,but again,it is not possible to state definitively how any specific tranche changes in value.Therefore,(c)is the most likely answer.

The Value of a CDO (Collateralized Debt Obligation)unambiguously Increases When