Why and How Can It Be That the More Junior

question 27

Essay

Why and how can it be that the more junior CMBS tranches command stated yields that are higher than the expected returns to the underlying property equity that backs the credit of these securities? Why are junior CMBS tranches more risky than whole first mortgages with the same LTV ratios?

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Definitions:

Labor Productivity

The measure of economic output per unit of input, typically calculated as total output divided by the number of hours worked.

Rules Of The Game

The laws, customs, manners, conventions, and other institutional elements that determine transaction costs and thereby affect people’s incentive to undertake production and exchange.

Tax Laws

The legal standards and regulations governing the collection of taxes by the government from individuals and organizations.

Property Rights

The legal rights to use, control, and derive benefits from a property or resource, including the right to exclude others from doing so.