LOS j: Describe collateralized debt obligations.

Q1. A CDO issued to profit on the spread between the return on the underlying assets and the return paid to investors is referred to as a(n):

A)   spread CDO.

B)   arbitrage CDO.

C)   balance sheet CDO.

Q2. A debt security that is collateralized by emerging market debt would be a(n):

A)   CMO.

B)   CDO.

C)   MTN.

Q3. A debt security that is collateralized by various corporate bonds would be a(n):

A)   TIP.

B)   CDO.

C)   CMO.

LOS j: Describe collateralized debt obligations.fficeffice" />

Q1. A CDO issued to profit on the spread between the return on the underlying assets and the return paid to investors is referred to as a(n):

A)   spread CDO.

B)   arbitrage CDO.

C)   balance sheet CDO.

Correct answer is B)

A CDO (collaterized debt obligation) issued to profit on the spread between the return on the underlying assets and the return paid to investors is referred to as an arbitrage CDO. A balance sheet CDO is created by a bank or insurance company wishing to reduce their loan exposure on the balance sheet. Spread CDO is a fabricated term.

Q2. A debt security that is collateralized by emerging market debt would be a(n):

A)   CMO.

B)   CDO.

C)   MTN.

Correct answer is B)

A CDO (collaterized debt obligation) is a debt obligation that is backed by an underlying diversified pool of business loans, mortgages, emerging market debt, corporate bonds, asset-backed securities, or non-performing loans. A MTN is a medium-term note issued by a corporation. A CMO (collaterized mortgage obligation) is a debt obligation that is backed by mortgages.

Q3. A debt security that is collateralized by various corporate bonds would be a(n):

A)   TIP.

B)   CDO.

C)   CMO.

Correct answer is B)

A CDO (collaterized debt obligation) is a debt obligation that is backed by an underlying diversified pool of business loans, mortgages, emerging market debt, corporate bonds, asset-backed securities, or non-performing loans. A TIP is a Treasury Inflation-Protected Security. A CMO (collaterized mortgage obligation) is a debt obligation that is backed by mortgages.

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