Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 12

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 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:

Frame Alignment Theory

A sociological theory that explains the process by which individuals with similar values and beliefs align their activities and movements, often in the context of social movements.

Strain Theory

A sociological theory that posits individuals may resort to criminality due to pressures or strains from societal expectations and the inability to achieve them through legitimate means.

Gustave Le Bon

A French social psychologist renowned for his work on crowd psychology, highlighting how an individual's behavior in a crowd differs from their behavior alone.

Émile Durkheim

A pioneering French sociologist known for his foundational contributions to sociology, including his studies on social cohesion and the role of religion in society.