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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

An SPV holds a pool of 200 million of loans and issues three tranches: senior 160 million, mezzanine 30 million, and equity 10 million. Pool losses of 25 million occur, with losses allocated sequentially from the most junior tranche upward. What is the loss borne by the mezzanine tranche, and what is the mezzanine tranche's attachment point as a percentage of the pool?

The mezzanine tranche loses 15 million and attaches at 5%. The 10 million equity tranche absorbs the first losses, leaving 15 of the 25 million for the mezzanine, and the equity's 10 million is 5% of the 200 million pool.

  1. ALoss of 15 million; attachment point 5%Correct
  2. BLoss of 25 million; attachment point 5%
  3. CLoss of 15 million; attachment point 20%
  4. DLoss of 10 million; attachment point 5%

Explanation

Equity absorbs the first 10 million, leaving 15 million of loss for the mezzanine tranche, which is under its 30 million size so the senior is untouched. The mezzanine attaches where the equity ends: 10/200 = 5%. Using 20% would wrongly use the senior's attachment (40/200 = 20% detaches the mezzanine).

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