Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 8

Multiple Choice

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.(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.Losses on the mortgage portfolio prove to be 16%.
-What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS

• A)50%
• B)60%
• C)80%
• D)100%

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Definitions:

Balance Sheet

A report detailing a business's assets, debts, and owners' equity at a particular moment, offering an overview of its financial health.

Accounting Cycle

The process of recording, classifying, summarizing, and reporting a company's financial transactions through the accounting period.

Journalize

The process of recording transactions in a journal, marking the first step in the accounting cycle.

Post-Closing Trial Balance

Prepared as an additional step in the accounting cycle to check that debits equal credits and all temporary accounts have been closed (have zero balances).