What does the credit protection seller receive in a CDO?

In a Collateralized Debt Obligation (CDO), the credit protection seller typically receives the total return of the referenced asset. This includes both the interest payments generated by the underlying assets and any capital appreciation or depreciation, if applicable. The structure of CDOs allows the seller of credit protection to earn returns from the cash flows of the underlying debt instruments in addition to potentially benefiting from the performance of those assets.

The total return provides a more comprehensive incentive for the credit protection seller, as it aligns their financial interests with the performance of the underlying portfolio. This total return aspect makes it an integral part of the risk-return equation in structured finance.

In contrast, options that suggest only receiving interest payments or a fixed percentage of the asset value would not encompass the full potential return structure in a CDO. Likewise, the notion that the seller receives no returns because the asset is risky does not recognize the profitability potential inherent in CDOs, where credit protection sellers can still earn a return even with associated risks.