CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features
A CDO manager is reinvesting principal proceeds from collateral that has matured, rather than paying them to the tranche holders. This stage of the CDO's life is best described as the:
This is the reinvestment period. During it, a CDO manager uses principal collected from maturing or repaid collateral to buy new collateral instead of repaying investors. Principal is returned to tranche holders only later, in the amortization or liquidation phases.
- Aamortization period
- Breinvestment periodCorrect
- Cliquidation period
Explanation
During the reinvestment (revolving) period of a cash flow CDO, principal collected is used to buy new collateral, so the pool size is maintained. Amortization and liquidation phases come after, when principal is paid down to investors.
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