What is a notable characteristic of collateralised debt obligations (CDOs)?

Collateralised debt obligations (CDOs) are notable for their payment structure, which is indeed derived from a diversified portfolio of debt instruments. This characteristic allows CDOs to pool various types of debt—including mortgages, corporate bonds, and other loans—to create a structured investment product. By drawing payments from this varied mix of underlying assets, CDOs can provide different tranches of investment opportunities, each with distinct risk and return profiles.

The diversification aspect is crucial because it generally helps to reduce the overall risk associated with the underlying assets compared to investing in any single loan or bond. This mechanism is what makes CDOs appealing to investors, as they can potentially achieve yield enhancements through exposure to various credit risks while spreading the risk across multiple borrowers.

Other options describe features that do not align with the nature of CDOs. For example, CDOs are structured financial instruments, allowing for complexity in their payment and risk distribution. They can be traded in secondary markets, meaning they can indeed change hands, and they primarily focus on debt instruments rather than solely investing in equities. These distinctions highlight the unique role of CDOs in portfolio management and investment strategies in the financial sector.