FRM Part II · FRM Exam Part II · An Introduction to Securitisation
A securitisation of a USD 500 million pool of auto loans issues a senior tranche of USD 400 million, a mezzanine tranche of USD 70 million and an equity (first-loss) tranche of USD 30 million. What is the attachment point of the mezzanine tranche?
The mezzanine tranche attaches at 6%. The equity tranche of USD 30 million is 6% of the USD 500 million pool and absorbs losses first, so the mezzanine only starts to lose once pool losses exceed 6%. Its detachment point is 20%.
- A6%Correct
- B14%
- C20%
- D24%
Explanation
The equity tranche absorbs the first USD 30 million of losses, which is 30/500 = 6% of the pool. The mezzanine therefore attaches at 6% and detaches at (30+70)/500 = 20%. The 14% option is the mezzanine's thickness (70/500), not its attachment point.
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