Which statement regarding a collateralized debt obligation (CDO) is true?

Question

Quizplus · Accepted Answer

A collateralized debt obligation (CDO) is a structured financial product that pools together cash flow-generating assets and repackages this asset pool into various tranches that can be sold to investors. Each tranche represents a different level of risk and reward. The cash flows from the assets are used to pay interest and principal to investors in each tranche. Each tranche of a CDO represents a claim on the cash flows of a loan, and therefore, option D is the correct answer. Option A is incorrect because a security may have default risk exposure depending on the underlying assets. Option B is also incorrect because a security's tax treatment depends on various factors, including the nature of the underlying assets, the structure of the security, and the tax laws of the jurisdiction. Option C is incorrect because a credit default swap is a separate financial product that allows investors to transfer credit risk from one party to another. While credit default swaps may be used in the creation of CDOs, they are not a necessary component of a CDO.

Which Statement Regarding a Collateralized Debt Obligation (CDO) Is True