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)?

1. To capture the excess spread between the loan pool's yield and the cost of the debt tranches.
2. To rely on the dual-recourse protection the collateral manager extends to junior holders.
3. To hedge a portfolio against falling rates by exploiting the equity tranche's positive convexity.
4. To secure a highly liquid, AAA-rated, senior-ranked position that carries minimal credit and default risk.

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