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FRM Part II · FRM Exam Part II · Structured Credit Risk

A securitization has total collateral of USD 500 million funded by a senior tranche of USD 400 million, a mezzanine tranche of USD 70 million and an equity tranche of USD 30 million. Pool losses over the life of the deal total USD 45 million, allocated in reverse order of seniority and ignoring excess spread. What loss does the mezzanine tranche suffer?

The mezzanine tranche loses USD 15 million. The equity tranche absorbs the first USD 30 million of the USD 45 million pool loss, and the remaining USD 15 million is allocated to the mezzanine tranche, which is large enough to absorb it, leaving the senior tranche unaffected.

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

Explanation

Equity absorbs the first USD 30 million. The remaining USD 15 million falls on the mezzanine tranche, which has USD 70 million of capacity. The senior tranche is untouched. Choosing USD 45 million ignores the equity first-loss layer.

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