Which of the following terms best describes this arrangement?

A bank holding a basket of credit sensitive securities transfers these to a special purpose vehicle (SPV), which sells notes based on these securities to third party investors.

Which of the following terms best describes this arrangement?
A . n-th to default swap
B . A credit default swap purchase
C . A synthetic CDO creation
D . A collateralized debt obligation issuance

View Answer

Answer: D

Explanation:

A traditional collateralized debt obligation (CDO) involves the complete transfer of securities to an SPV, which then issues notes or securities to investors. Therefore Choice ‘d’ is the correct answer.

A synthetic CDO achieves the same result as a traditional CDO, but uses credit derivatives to synthetically create the same economic effect as a traditional CDO.

A credit default swap is a derivative instrument that pays in the event of the occurrence of agreed credit events. The arrangement described in the question is not a credit default swap purchase. n-th to default swap arrangements are similar to CDSs, but on a portfolio with the first ‘n’ losses being covered by the swap.