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PRMIA Exam 8006 Topic 5 Question 62 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 62
Topic #: 5
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

Credit risk in the case of a CDO (Collateralized Debt Obligation) is borne by:

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Suggested Answer: B

Investors in CDOs bear credit risk. The SPV is merely a conduit that owns the underlying assets on which the sponsoring institution has bought protection. The investors have sold them this protection, and are on the hook for defaults or other credit events. The reference entity is relevant only to CDSs, not CDOs. Choice 'b' is the correct answer.


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