Skip to content

CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features

A securitization has collateral of 500 million. The structure has a senior tranche of 400 million, a mezzanine tranche of 70 million and an equity (residual) tranche of 30 million. Ignoring excess spread and any reserve, the senior tranche's loss cushion is closest to:

The senior tranche's cushion is about 20% of collateral. Mezzanine of 70 million plus equity of 30 million gives 100 million of subordination, and dividing by the 500 million pool yields 20%. Counting only one junior tranche would understate the protection.

  1. A6% of collateral
  2. B14% of collateral
  3. C20% of collateralCorrect

Explanation

Subordination beneath the senior tranche is 70 + 30 = 100 million. As a share of the 500 million collateral, this is 100/500 = 20%. The 6% figure is the equity tranche only (30/500), which ignores the mezzanine. The 14% figure is the mezzanine only (70/500), which ignores the equity tranche.

Did you get it right without looking?

One question tells you little. A timed set on Asset-Backed Security (ABS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.

Practise Asset-Backed Security (ABS) Instrument and Market FeaturesFree diagnostic mock

More Asset-Backed Security (ABS) Instrument and Market Features questions