In order to sell the mortgage-backed securities to the pension fund managers (who require low-risk securities) and hedge fund managers (who require high-yield securities), the investment bank decides it will need to turn the MBSs into collateralized debt obligations that are segmented into three tranches. The first tranche investors get paid before the investors in the remaining two tranches, the second tranche investors get paid after the first tranche investors and before the third tranche investors, and the third tranche investors get paid after the investors in the other two tranches. The following tables outline the payment order, yields, and ratings of each of the tranches within three CDOs that the investment bank could create. Using the tables, answer the questions that follow. Yield CDO 1 Tranche Payment Order 1 First 2 Second 3 Third 2% Rating A BB B 6% 2 3 7% Tranche Yield CDO 2 Payment Order First Second Rating BB 1 6% N 12% 3 Third 13% DDD Tranche CDO 3 Payment Order First Second Third 1 Yield Rating 3% AAA 2 12% 3 17% CC Which CDO would be most appealing to pension fund managers? CDO 1 CDO 2 CDO 3 Which tranche in that CDO would be most appealing to pension fund managers? O Tranche 1 O Tranche 2 O Tranche 3 Which CDO would be most appealing to hedge fund managers? CDO 1 O CDO 2 CDO 3 Which tranche in that CDO would be most appealing to hedge fund managers? Tranche 1 Tranche 2 O Tranche 3 Based on your answers to the previous questions, which CDO should the investment manager create so that both classes of investors will purchase the securities? CDO 1 CDO 2 O CDO 3