question archive An asset-backed security (ABS) is created out of subprime mortgages
An asset-backed security (ABS) is created out of subprime mortgages
Subject:FinancePrice: Bought3
An asset-backed security (ABS) is created out of subprime mortgages. It consists of: a senior tranche (75% of par value), a mezzanine tranche (X %), and an equity tranche [(25 - X) %]. An ABS CDO is then created out of the mezzanine tranche of the original ABS, which includes: a senior tranche (75% of par value), a mezzanine tranche (20%), and an equity tranche (5%). When the subprime portfolio loses 15% of its value, the mezzanine tranche of the original ABS loses 1/6 of its value. (1) What is X (X ≠ 20%)? (2) What is the loss level of the subprime portfolio that will result in the senior tranche of the ABS CDO losing 3/4 of its value?
