Collateralised debt obligations (CDOs) were responsible for significant damage and disruption to global financial markets as:
A)investors accepted the recommendations of CDO arrangers and rating agencies
B)many investors were unable to assess the fairness of prices
C)the securities' cash flow was based on cash flows from other financial securities and not the cash flows from real assets
D)the CDOs' cash flows were based on cash flows from real assets and not from other financial securities

Question

Quizplus · Accepted Answer

CDOs were backed by other financial securities (such as mortgage-backed securities) instead of real assets. As a result, the cash flow of the CDOs was based on the performance of these underlying securities, rather than real assets, making them highly complex and difficult to assess. This complexity, combined with the fact that many investors accepted the recommendations of CDO arrangers and rating agencies without fully understanding the risks, ultimately led to significant damage and disruption in global financial markets.

Collateralised Debt Obligations (CDOs) Were Responsible for Significant Damage and Disruption