medium · Debt Capital Markets bond-instruments-structures
What is the primary motive for an investor to purchase the equity tranche of a Collateralized Loan Obligation (CLO)?
- To capture the excess spread between the loan pool's yield and the cost of the debt tranches.
- To rely on the dual-recourse protection the collateral manager extends to junior holders.
- To hedge a portfolio against falling rates by exploiting the equity tranche's positive convexity.
- To secure a highly liquid, AAA-rated, senior-ranked position that carries minimal credit and default risk.
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