Tranching: CDOs in slices

2. Tranching

A key difference between CDOs and pooled investment vehicles such as mutual funds and investment trusts, however, is that with CDOs risk is apportioned among investors and sellers of protection to cater much more efficiently for the variances in risk appetite within the investment community.

As the Bond Market Association (BMA) explains in its CDO Primer published in 2005: "Unlike a mutual fund, in which investors have rights and risks in proportion to the size of their investment, some CDO i

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