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:

Cultural Identities

The identity or feeling of belonging to a group, influenced by one’s culture, encompassing language, traditions, customs, and shared beliefs.

Racial Diversity

The inclusion of individuals representing more than one national, cultural, or ethnic background within a community or organization.

Genocide

The intentional extermination of all members of a minority group.

North America

A continent located in the Northern Hemisphere, largely bordered by the Atlantic Ocean to the east and the Pacific Ocean to the west.