Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 4

Short Answer

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 75%, mezzanine 20% and equity 5%. An ABS CDO is then created from the mezzanine tranche with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What as a per cent of tranche principal) are the losses on:
i) The equity tranche of the ABS? _ _ _ _ _ _
ii) The mezzanine tranche of the ABS? _ _ _ _ _ _
iii) The senior tranche of the ABS? _ _ _ _ _ _
iv) The equity tranche of the ABS CDO? _ _ _ _ _ _
v) The mezzanine tranche of the ABS CDO? _ _ _ _ _ _
vi) The senior tranche of the ABS CDO? _ _ _ _ _ _

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Definitions:

Sales

The trading of products or services in return for money, which serves as the main income stream for the majority of companies.

Cost of Goods Sold

The immediate expenses incurred in the production of a company's sold goods, encompassing materials, labor, and overhead costs.

Operating Expenses

Expenses incurred during regular business operations, such as rent, utilities, and salaries, but excluding cost of goods sold.

Cash Payments

Outflow of cash as a result of transactions, such as paying expenses, purchasing assets, or repaying debt.