CDOs are divided in tranches

Question

Quizplus · Accepted Answer

CDOs are divided into tranches, with each tranche representing a different level of seniority in terms of its claims on the underlying pool of assets. This means that some tranches have a higher priority in terms of receiving payments, while others have a lower priority. Additionally, each tranche represents securities with varying degrees of credit risk, with lower tranches being riskier but also offering potentially higher returns. Therefore, the correct answer is E, as both options A and B are correct. Option C is incorrect because all tranches have some level of credit risk, while option D is incorrect because equity tranches are among the riskiest.

CDOs Are Divided in Tranches