"Fixed Income":bankruptcy reorganization

C is correct. When a company is reorganized, the strict absolute priority has not always been upheld by the courts.

A is incorrect because in liquidations, the absolute priority rule generally holds.

B is incorrect because in the case of a SPV securitization, the courts (in most jurisdictions) have no discretion to change absolute priority because the bankruptcy of a company does not affect the SPV. The SPV is considered bankruptcy remote.

B is correct. In the case of defaults in collateral, there is a risk that the CDO manager will not earn a sufficient return to pay off the investors in the senior and mezzanine tranches. This will result in losses to these classes of bondholders.

A is incorrect because if the CDO manager fails to meet certain pre-specified tests, a provision is triggered that requires the payoff of the principal to the senior bond classes until the tests are satisfied.

C is incorrect because the CDO manager is using leverage to generate a return above the funding cost for the equity tranche holders. If certain pre-specified tests are not met by the CDO manager, a provision is triggered that requires the payoff of the principal to the senior bond classes until the tests are satisfied, thus deleveraging the CDO.