Is the senior tranche a relatively safe investment

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Consider the following two scenarios:

Scenario 1: Suppose the mortgages in the MBS have very low default correlation (close to 0).

a. Is the senior tranche a relatively safe investment?

b. Is the equity tranche a relatively high-risk investment?

Scenario 2: Suppose the mortgages in the MBS have very high default correlation (close to 1)

a. Is the senior tranche a relatively safe investment?

b. Is the equity tranche a relatively high-risk investment

Reference no: EM133002105

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