Explain the role of credit rating agencies

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Suppose that the principals assigned to the senior, mezzanine, and equity tranches for the ABS, the ABS CDO 1 and the ABS CDO 2 are as in figure 1.

a) What are the effects of 7.5%, 10%, 15%, 20% and 25% losses on subprime portfolios on the losses of all ABS, ABS CDO 1 and ABS CDO 2 tranches in figure 1? Make sure your calculations are clear and explain your answers.

b) Spot which tranches of any of the assets in figure 1 are more prone to cliff risk. Are the ratings of the tranches of the assets consistent with each other? Explain the role of credit rating agencies and securitization in the 2007 credit crisis. Use the results you find in a) to justify your answers.

Reference no: EM133001326

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