Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.(The portfolios of subprime mortgages have the same default rates.)An ABS CDO is then created from the mezzanine tranches with the same allocation of principal.Losses on the mortgage portfolio prove to be 16%.
-What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS CDO
A)50%
B)60%
C)80%
D)100%

Question

Quizplus · Accepted Answer

As the answer to the previous question shows,the mezzanine tranches are 60% wiped out.The first 10% out of this 60% is absorbed by the equity tranche of the ABS CDO.The next 10% is absorbed by the mezzanine tranche of the ABS CDO.The remaining 40% is absorbed by the senior tranche of the ABS CDO.The mezzanine tranche of the ABS CDO is therefore 100% wiped out

Suppose That ABSs Are Created from Portfolios of Subprime Mortgages