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:

Endoderm

The inner layer of an embryonic disk, which will develop into the digestive system, liver, lungs, pancreas, salivary glands, and respiratory system.

Ovum

The female reproductive cell or egg cell.

Zygote

The initial cell formed when a sperm cell fertilizes an egg cell, representing the earliest stage of embryonic development.

Prenatal Development

The process of growth and development within the womb from conception to birth.