FRM Part II · FRM Exam Part II · Credit Risk Management
A securitization has a USD 100 million pool with tranches: equity 0-5%, mezzanine 5-15%, senior 15-100%. Cumulative pool losses reach USD 12 million. What loss does the mezzanine tranche absorb, as a percentage of the mezzanine tranche's principal?
The mezzanine tranche loses 70 percent of its principal. The equity tranche absorbs the first USD 5 million of the USD 12 million loss, leaving USD 7 million for the mezzanine tranche, which is USD 10 million in size, so the loss is 7 divided by 10.
- A20%
- B70%Correct
- C12%
- D100%
Explanation
Equity absorbs the first 5 million. The remaining 7 million falls on the mezzanine, whose size is 10 million (5% to 15%). Loss share = 7/10 = 70%. Using 12 million/ 100 million gives 12%, which ignores the attachment point.
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