Reference no: EM133117195
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 75%, mezzanine 20%, and equity 5%. An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%.
A. The equity tranche of the ABS has lost 16%, the mezzanine tranche of the ABS has lost 16%, and the senior tranche of the ABS has lost 16%.
B. The equity tranche of the ABS has lost 0%, the mezzanine tranche of the ABS has lost 0%, and the senior tranche of the ABS has lost 21%.
C. The equity tranche of the ABS CDO has lost 100%, the mezzanine tranche of the ABS CDO has lost 100%, and the senior tranche of the ABS CDO has lost 100%.
D. The equity tranche of the ABS CDO has lost 100%, the mezzanine tranche of the ABS CDO has lost 100%, and the senior tranche of the ABS CDO has lost 40%.
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