Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 8

Multiple Choice

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

• A)50%
• B)60%
• C)80%
• D)100%

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Definitions:

Omission

The act of leaving something out or not including something.

Reasonable Person

A hypothetical individual who exercises average care, skill, and judgment in conduct and is often used as a standard for determining negligence.

Abnormally Dangerous Activity

Activities that inherently involve a high risk of causing significant harm, where the party conducting the activity may be held strictly liable for any damages.

Discharge of Fireworks

The act of igniting fireworks, which can be subject to local regulations or laws governing their use.