Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 4

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 senior tranche of the ABS CDO bears losses?

• A) 5.5%
• B) 6.0%
• C) 6.5%
• D) 7.0%

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Definitions:

Vitreous Humor

A jelly-like substance that fills the part of the eye behind the lens and helps the eye keep its shape.

Conjunctivas

Mucous membranes that cover the front of the eye and line the inside of the eyelids, playing a role in lubrication and protection against infection.

Mucous Membranes

Mucous membranes are moist tissues that line several body cavities including the mouth, nose, eyelids, and internal organs, secreting mucus for protection and moisture.

Eyelids

Thin folds of skin that cover and protect the eyes, capable of blinking to help keep the eyes moist and free of debris.