FRM Part II · FRM Exam Part II · Credit Risk
A securitization pool has a balance of USD 500 million with tranches: equity USD 25 million (0% to 5%), mezzanine USD 75 million (5% to 20%), senior USD 400 million (20% to 100%). The pool suffers cumulative losses of USD 60 million after recoveries. What percentage of the mezzanine tranche's principal is lost?
The mezzanine loses 46.7% of its principal. The equity tranche absorbs the first USD 25 million of the USD 60 million loss, leaving USD 35 million to hit the USD 75 million mezzanine tranche. Dividing 35 by 75 gives about 46.7 percent, and the senior tranche is unaffected.
- A46.7%Correct
- B80.0%
- C12.0%
- D100.0%
Explanation
Equity absorbs the first 25 million, leaving 35 million for the mezzanine. Mezzanine loss is 35/75 = 46.7%. Using 60/75 = 80% ignores the equity cushion. 12% is pool loss as a share of the pool (60/500). 100% would require losses of at least 100 million. The senior tranche is untouched.
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