What is the primary goal of Cash Flow CDOs?

The primary goal of Cash Flow Collateralized Debt Obligations (CDOs) is indeed to minimize defaults by managing credit quality. Cash Flow CDOs are structured investment vehicles that are typically made up of a diversified pool of fixed-income assets, commonly including corporate bonds, asset-backed securities, and other debt instruments.

In a Cash Flow CDO, the focus is on the cash flows generated from the underlying assets, which are used to pay interest and principal to investors. To ensure a steady and reliable stream of cash flows, the managers of Cash Flow CDOs actively monitor and manage the credit quality of the assets in the portfolio. This involves selecting a mix of high-quality and lower-quality assets to balance risks and optimize returns while minimizing the likelihood of defaults.

This careful management approach is crucial because defaults on the underlying assets can affect the entire structure's ability to meet its obligations to investors. Therefore, by focusing on credit quality, Cash Flow CDO managers aim to protect the investment and provide stable returns to investors over time.