Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 14

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 mezzanine tranche of the ABD CDO bears losses?

• A) 5.0%
• B) 5.5%
• C) 6.0%
• D) 6.5%

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Definitions:

Separation

The process or state of being apart from something or someone, often used to describe the emotional process of detaching from a person, place, or thing.

Earlier

Occurring before a specified time or event.

A-not-B Error

A cognitive error observed in infants where they search for an object where it was previously found rather than its new location after observing it being moved.

Object Permanence

Object permanence is the understanding that objects continue to exist even when they cannot be seen, heard, or otherwise sensed, a crucial milestone in cognitive development during infancy.