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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Domestic Corporations

Companies that are incorporated and operate within the legal framework of a specific country.

Subsidiaries

Companies that are partially or fully owned by another company, which usually holds a controlling interest in the subsidiary's shares.

Accrual-based Net Income

Net income calculated under the accrual basis of accounting, recognizing revenues when earned and expenses when incurred, regardless of cash flow.

Domestic Corporations

Companies that are incorporated and operate within the legal jurisdiction of a specific country.