Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 11

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 senior tranche of the ABS CDO

• A) 50%
• B) 60%
• C) 80%
• D) 100%

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Definitions:

Lewis Terman

An American psychologist best known for his revision of the Stanford-Binet IQ test and his longitudinal studies on gifted children.

IQ Distribution

The statistical spread of IQ scores in a population, typically forming a bell curve where the majority of scores cluster around the average and fewer scores lie at the extremes of high and low intelligence.

Termites

Insects that are known for their ability to consume wood and other materials, often causing damage to structures.

Metacognition

Metacognition is the awareness and understanding of one's own thought processes, often referred to as "thinking about thinking," which plays a critical role in learning and problem-solving.