Skip to content

FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A securitisation vehicle issues three tranches backed by a loan pool of USD 500 million: senior USD 400 million, mezzanine USD 70 million, and equity USD 30 million. Pool losses over the life of the deal total USD 45 million. Assuming losses are allocated strictly by seniority with no excess spread, what is the loss borne by the mezzanine tranche?

The mezzanine tranche loses USD 15 million. Equity absorbs the first USD 30 million of the USD 45 million pool loss, and the remaining USD 15 million passes to the mezzanine tranche because losses are allocated from the most junior tranche upward.

  1. AUSD 15 millionCorrect
  2. BUSD 45 million
  3. CUSD 0
  4. DUSD 30 million

Explanation

Losses are absorbed first by the equity tranche up to USD 30 million. The remaining USD 15 million falls on the mezzanine tranche, which has USD 70 million of principal. The senior tranche is untouched. Choosing USD 30 million confuses the equity loss with the mezzanine loss.

Did you get it right without looking?

One question tells you little. A timed set on An Introduction to Securitisation shows your real accuracy, how long you take and where you lose marks.

Practise An Introduction to SecuritisationFree diagnostic mock

More An Introduction to Securitisation questions