AIM 39.3 benefit of balance sheet CDO

FRM
#1

hI,

AIM 39.3 benefit of balance sheet CDO:

Could you please explain the this sentence?

One of the motivation of balance sheet CDO is to isolate the assets to reduce the adverse selection cost of self-selected lemons and increasing transparency, which, in turn, lower firm’s weighted average cost of captial.

I don’t know why weighted average cost of captial can be reduced.

Thanks

#2

Is it FRM Part 2? Can I make a wild guess? Transparency affects perceived risk, which in turn affects the cost of debt and the cost of equity, thus lowering WACC.

#3

If you use schweser notes to prepare, I think you can refer to page 240 of book 2 (part 2). There will be less monitoring cost incurred by investors so lower required rate of return.

Please correct me if I am wrong.