What do collateralised debt obligations (CDOs) derive their value from?

Collateralised debt obligations (CDOs) derive their value from a diversified portfolio of fixed income assets, which typically includes various types of loans and bonds. These assets are pooled together and then restructured into different tranches, each with varying levels of risk and return. This structure allows investors to choose a tranche that aligns with their risk appetite and investment goals.

The portfolio approach of a CDO enables it to offer a higher yield than individual securities while also spreading risk among the different underlying assets. This diversification can enhance the appeal of CDOs for investors, as the cash flow generated from the underlying assets can support the payments to investors.

In contrast, the other options do not accurately reflect the nature of CDOs. A reliance on a single type of fixed income asset would not provide the risk diversification characteristic of CDOs. Exclusivity to government securities would limit the range of assets and potentially reduce yield, while cash and cash equivalents do not constitute a source of value for CDOs, as they do not generate income in the same manner as fixed income assets. Thus, the correct understanding of CDOs centers on their value being derived from a broad portfolio of fixed income assets.