Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 18

Multiple Choice

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 94.5% (rated AAA) , mezzanine 0.1% (rated BBB) , and equity 5% (rated C) . The portfolios of subprime mortgages have the same default rates. An ABS CDO is then created from the mezzanine tranches. Which of the following is true?

• A) The ABS CDO tranches should have similar ratings ranging from AAA to C
• B) The ABS CDO tranches should all be rated BBB
• C) The ABS CDO tranches should all be rated C
• D) The ABS CDO tranches are almost worthless because the mezzanine tranches are so thin

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Definitions:

Authoritarianism

A leadership style marked by strict adherence to authority and control, often at the expense of individual freedom and creativity.

Sensation-Type

This term appears to relate to psychological typologies, possibly referring to a preference for sensory input and practical experiences in decision-making processes.

Problem-Solving Styles

The various approaches or strategies individuals employ when confronting and resolving issues or challenges.

Sensation-Type

A personality dimension focusing on individuals who prefer concrete, practical information and experiences.