Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 4

Multiple Choice

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 85%,mezzanine 10%,and equity 5%.(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.How high can losses on the mortgages be before the senior tranche of the ABS CDO bears losses?

• A) 5.5%
• B) 6.0%
• C) 6.5%
• D) 7.0%

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Definitions:

Direct Labor

The workforce directly involved in manufacturing a product or delivering a service, whose costs are directly attributable to the product.

Variable Manufacturing

Costs in manufacturing that vary with the level of production output, such as raw materials and labor costs.

Factory Overhead

All indirect costs associated with manufacturing, such as utilities, maintenance, and depreciation of equipment, excluding direct materials and direct labor.

Direct Labor

Direct labor refers to the work of employees directly involved in the manufacturing of products.