CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the characteristics of collateralized debt obligations (CDOs)?

I. The underlying asset pool that funds the CDO is generally composed of investment-grade corporate bonds and bank loans.
II. A credit enhancement feature is to make the coupon rate on the senior tranches fixed, while the subordinated tranches are given a floating-rate structure.
III. The underlying asset pool that funds the CDO is generally composed of bonds that have a fixed coupon rate.
IV. During the reinvestment phase of the CDO's life cycle, only prepayments (and not coupons) generated by the pool are reinvested back into the pool so that more bonds may be purchased.
A. III and IV
B. II and III
C. I and II
Explanation: I is incorrect. The underlying asset pool that funds the CDO is generally composed of "non-investment" grade corporate bonds and bank loans.

II is incorrect. Generally, it is the senior tranches that are given a floating-rate coupon rate structure, while the subordinated tranches are given a fixed coupon rate.

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