Question: Consider a situation with subprime loans are packaged into an MBS with the MBS Mezzanine tranch repackaged into a CDO. The MBS is 75% Senior,

Consider a situation with subprime loans are packaged into an MBS

Consider a situation with subprime loans are packaged into an MBS with the MBS Mezzanine tranch repackaged into a CDO. The MBS is 75% Senior, 20% Mezzanine, 5% Equity. The CDO takes that 20% mezzanine and tranches it into 75% Senior, 20% mezzanine and 5% Equity. This structure is exactly like the one we saw in the financial crisis lecture in class. Assume that the default rate on the subprime mortgages is 40%. Because house prices have grown, the recovery rate on defaulted loans is 80%. What are the % losses on the Senior tranches of the MBS

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