ABSTRACT
Aer introducing CDOs in Section 9.2, we perform a quantitative analysis of the structure in Section 9.3, using some results about bonds which can default in two distinct ways with two distinct recovery rates in Section 9.4. In particular, we use this analysis to show that if investors only pay the actuarial, present value of the expected-value price for bonds derived in the previous chapter, no riskless prots, or arbitrage, can be created by tranching.
