Suppose That ABSs Are Created from Portfolios of Subprime Mortgages

question 18

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 of the ABSs 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 CDO

• A) 50%
• B) 60%
• C) 80%
• D) 100%

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Definitions:

Make or Buy

A decision-making process in businesses to determine whether to produce goods internally or purchase them from an external supplier.

Operating Capacity

The maximum output that a company can produce under normal conditions over a specific period of time.

Setup

An overhead activity that consists of changing tooling in machines in preparation for making a new product.

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Changing tooling involves updating or replacing the sets of tools used in manufacturing processes to improve efficiency or adapt to producing a different product.