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FRM Part I · FRM Exam Part I · Credit Risk Transfer Mechanisms

A CLO mezzanine tranche attaches at 5% and detaches at 15% of a loan pool. Over the life of the deal, cumulative pool losses reach 11% of the original pool notional. What is the percentage loss suffered by the mezzanine tranche?

The mezzanine tranche loses 60%. Pool losses of 11% exceed the 5% attachment point by 6 percentage points, and the tranche is 10 percentage points thick, so its loss is 6 divided by 10, or 60% of its principal.

  1. A60%Correct
  2. B40%
  3. C11%
  4. D73%

Explanation

Pool losses above the 5% attachment point hit the tranche: 11% - 5% = 6% of pool notional. Tranche thickness is 15% - 5% = 10%. Tranche loss = 6/10 = 60%. Using 4/10 confuses the loss with remaining value; 11% ignores subordination.

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