When the collateral manager fails pre-specified risk tests, a Cdo is:
A) deleveraged by reducing the senior bond class.
B) restructured to reduce its most expensive funding source.
C) liquidated by paying off the bond classes in order of seniority.

Question

Quizplus · Accepted Answer

When the collateral manager fails pre-specified risk tests, the CDO is often deleveraged by reducing the senior bond class. This allows the CDO to maintain some level of performance, while reducing risk to the bondholders. Restructuring or liquidation may also be possible, but deleveraging is the most common solution.

When the Collateral Manager Fails Pre-Specified Risk Tests, a Cdo