FRM Part II · FRM Exam Part II · Structured Credit Risk
A securitization pool of USD 500 million of loans is funded with a USD 400 million senior tranche, a USD 70 million mezzanine tranche and a USD 30 million equity tranche. What is the subordination (credit enhancement) level that protects the senior tranche?
The senior tranche has 20% subordination, because the mezzanine and equity tranches together total USD 100 million of the USD 500 million pool. These junior tranches absorb losses first, so pool losses up to 20% do not reach the senior investors.
- A6%
- B14%
- C20%Correct
- D30%
Explanation
Subordination for the senior tranche is the share of the capital structure below it: (70 + 30) / 500 = 20%. 14% counts only the mezzanine tranche, and 6% counts only the equity tranche. 30% is not a share of the pool: it is the equity amount in millions.
Did you get it right without looking?
One question tells you little. A timed set on Structured Credit Risk shows your real accuracy, how long you take and where you lose marks.
More Structured Credit Risk questions
- An investor compares two ABS deals backed by similar consumer loans. Deal A uses a sequential-pay structure, while Deal B uses a pro-rata st…
- A pool of 1,000 million of loans pays a weighted average coupon of 7%. Notes of 900 million pay 5% and the 100 million equity piece receives…
- A bank transfers a pool of auto loans to a newly created legal entity that issues notes to investors, with the entity's legal status designe…
- A risk manager compares a cash CDO with a fully unfunded synthetic CDO that references the same portfolio of corporate credits. Which is a k…
- A bank sponsors a cash CLO that holds a pool of leveraged loans and funds it with senior, mezzanine and equity tranches. Which statement bes…
- Which lesson from the subprime crisis is most directly addressed by requiring sponsors of securitizations to retain a portion of the credit …