Series 7 practice questionhardCDOs — Structure
A collateralized debt obligation (CDO) differs from a CMO primarily because a CDO:
- AIs backed exclusively by residential mortgages
- BCan be backed by a diverse pool of debt instruments including bonds, loans, and other structured products✓ Correct answer
- CIs always guaranteed by the US government
- DHas only one tranche that receives all cash flows
Explanation
Why B — Can be backed by a diverse pool of debt instruments including bonds, loans, and other structured products
While CMOs are backed specifically by mortgage loans or mortgage-backed securities, CDOs can be backed by a broader range of debt instruments including corporate bonds, bank loans, mortgage-backed securities, and other asset-backed securities. Like CMOs, CDOs are divided into tranches (senior, mezzanine, and equity) with varying risk-return profiles. Senior tranches have first claim on cash flows and lower risk, while equity tranches bear the first losses.
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