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CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features

In a collateralized debt obligation (CDO), the special purpose entity that issues the tranches is most likely to hold which of the following as its collateral?

A CDO's issuing entity holds a pool of debt obligations, such as corporate bonds, loans or structured finance securities, as collateral. The tranches it issues are paid from the cash flows on that debt pool, not from the sponsor's equity or commodity derivatives.

  1. AA pool of debt obligationsCorrect
  2. BEquity shares of the sponsor
  3. CDerivative contracts on commodity prices

Explanation

A CDO is a securitization in which a special purpose entity buys a diversified pool of debt obligations such as bonds, loans or other structured products and issues tranches backed by the cash flows. The sponsor's equity shares and commodity derivatives are not the typical collateral.

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