FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A non-agency MBS pool has a balance of USD 500 million. It is divided into a senior tranche of USD 400 million, a mezzanine tranche of USD 75 million and an equity tranche of USD 25 million. Losses are allocated bottom-up. If cumulative pool losses reach USD 60 million, what percentage of the mezzanine tranche's principal is lost?
The mezzanine tranche loses 46.7% of its principal. The equity tranche takes the first USD 25 million of the USD 60 million loss, leaving USD 35 million for the USD 75 million mezzanine tranche, and the senior tranche is untouched.
- A0%
- B46.7%Correct
- C80.0%
- D100.0%
Explanation
The equity tranche absorbs the first USD 25 million. The remaining USD 35 million falls on the mezzanine tranche. USD 35 / USD 75 = 46.7%. Choosing 80% wrongly divides 60 by 75, ignoring the equity cushion.
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