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16 suppose that abss are created from porsolios of

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16.Suppose that ABSs are created from porSolios of subprime mortgages with the followingalloca?on of the principal to tranches:senior 85%, mezzanine 10%, and equity5%. (TheporSolios of subprime mortgages have the same default rates.) An ABS CDO is then created from
the mezzanine tranches with the same alloca?on of principal. How high can losses on themortgages be before the senior tranche of the ABS CDO bears losses?
17.Suppose that ABSs are created from porSolios of subprime mortgages with the followingalloca?on of the principal to tranches:senior94.5% (rated AAA), mezzanine0.1% (rated BBB),and equity5% (rated C) . The porSolios of subprime mortgages have the same default rates. AnABS CDO is then created from the mezzanine tranches. Which of the following is true?
18.Which of the following describes regulatory arbitrage?
19.Which of the following describes a subprime mortgage?A.The rate of interest is less than the prime rate of interestB.The loan-to-value ra?o is below averageC.The life of the mortgage is less than 25 yearsD.The credit risk is high
20.Which of the following would be described by the term “liar loan”?
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Tags
Debt, Subprime mortgage crisis, Tranche

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