Fixed-income Active management : CDOs

CFA Level III Fixed Income
#1

Dear Sirs and Mesdames,

I don’t seem to understand Reading 25’s 15th question (Book 4, page 289) : Three comments are proposed regarding CDOs :

1 - If the correlation of the expected defaults on the CDO collateral of the senior and subordinated tranches is positive, the relative value of the mezzanine tranche compared with the senior and equity tranches will increase

2 - Replacing a portion of the corporate bonds with CDOs will provide meaningful diversification to the investment portfolio

3 - Investing in covered bonds will give us the yield increase we are seeking compared with investing in corporate bonds or asset-backed securities

Only the first comment is right according to the answer, page 291. Can someone explain why the third is inaccurate ? Indeed, page 281, the relative value section of CDOs explain that some CDOs trade at higher yields than their underlyings.

#2

Covered Bond=Secured Bonds

ABS=Secured Bonds

Corporate Bonds=Unsecured Bonds

How can you expect secured bonds to give you better yield than unsecured ones?

#3

Covered bonds are secured by collateral, lowering the risk of the lender losing out due to credit risk and in turn leading to lower yields (due to lower risk).