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:

Toddlerhood

The stage of human development spanning from approximately 1 to 3 years of age, characterized by rapid growth and learning.

Autonomy

The capacity to make an informed, uncoerced decision; often related to independence and the ability to self-govern.

Neglect

Failure to meet a dependent’s basic needs.

Physical Abuse

Action taken deliberately to endanger another person, involving potential bodily injury.