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

A securitization pool of 200 million has a 10 million equity tranche, a 30 million mezzanine tranche, and a 160 million senior tranche. Cumulative pool losses reach 22 million with no recoveries beyond that figure. What loss does the mezzanine tranche suffer, and what share of its principal is that?

The mezzanine tranche loses 12 million, which is 40% of its principal. Equity absorbs the first 10 million of the 22 million pool loss, leaving 12 million for mezzanine against its 30 million balance, and senior is unaffected.

  1. A12 million, 40%Correct
  2. B22 million, 73.3%
  3. C10 million, 33.3%
  4. D12 million, 7.5%

Explanation

Equity absorbs the first 10 million. The remaining 12 million falls on mezzanine, which has 30 million of principal. 12/30 = 40%. Senior is untouched. Allocating the full 22 million to mezzanine ignores the equity cushion.

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