Suppose that an ABS is created from a portfolio of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.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
A) 50%
B) 60%
C) 80%
D) 100%

Question

Quizplus · Accepted Answer

10% out of the 16% loss is absorbed by the equity tranche.The remaining 6% is absorbed by the mezzanine tranche.The total size of the mezzanine tranche is 10%.It is therefore 60% wiped out.

Suppose That an ABS Is Created from a Portfolio of Subprime