If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?
A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year
B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year
C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year
D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year

Question

Quizplus · Accepted Answer

Trading is organized so that the trader pays 60 basis points.Because the spread is actually only 55 basis points the trader receives an estimate of the present value of 5 basis points per year at the outset.This means that the tranche trades like a bond.

If a Tranche Spread Is 55 Basis Points and the Fixed