Assume that the loans in a BBB tranche of an MBS with $100MM in assets that is securitized into a CDO are perfectly correlated, that they cover 5% of the total assets of the MBS. The equity tranche of the MBS is worth $5 million and the BBB tranche of the MBS is worth $5 million. Assume that defaults in the underlying MBS amount to $8 million. (so equity tranche in the MBS gets wiped out).

For the CDO that is created from the BBB MBS tranche, assume that the super senior tranche of the CDO covers 70% of the total tranche. Assume also that in the CDO there is an AAA tranche covering 10% of the CDO, a BBB tranche covering 10% and an equity tranche covering 10%.

Answer the following questions about the CDO

What will be the dollar loss to the equity tranche of the CDO?

What will be the dollar loss to the BBB tranche of the CDO?

What will be the dollar loss to the AAA tranche of the CDO?

What will be the dollar loss to the super-senior tranche of the CDO?

Answer rating: 100% (QA)

To calculate the losses for each tranche in the CDO we need to follow the waterfall structure typica... View the full answer