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:

Serotonin

A neurochemical that plays a crucial role in mood regulation, as well as influencing various other bodily functions like sleep, digestion, and clotting.

Depression

A mood disorder characterized by persistent feelings of sadness, loss of interest, and a lack of pleasure in daily activities.

Tardive Dyskinesia

A neurological syndrome characterized by repetitive, involuntary, purposeless movements, often caused by long-term use of certain psychiatric drugs.

Neuroleptic Drugs

These are a class of medications primarily used to manage psychosis, particularly in schizophrenia and bipolar disorder, by blocking dopamine receptors.