A Mortgage Pool Is Divided into A,B,C,and Z-Tranches Based on the Textbook

question 9

Multiple Choice

A mortgage pool is divided into A,B,C,and Z-tranches based on the textbook example.The mortgage principal will initially be paid to which one of the tranches?

• A) A-tranche
• B) B-tranche
• C) C-tranche
• D) Z-tranche
• E) all tranches on a pro-rata basis

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Definitions:

Risk Premium

The extra return expected by an investor for holding a risky asset instead of a risk-free asset.

Expected Return

The average return an investor anticipates on an investment which is uncertain, based on the probable returns.

States of Economy

The various conditions that can describe an economy, including growth, recession, depression, and recovery.

Probabilities

A measure of the likelihood that a certain event will occur, often expressed as a number between 0 and 1.