Question: Following is a CMO structure: Tranche Total Face Value (USD Millions) Rating AAA 120 Aaa AA 72 Aaa B 50 Aa2 C 35 A2 D

Following is a CMO structure:

Tranche

Total Face Value (USD Millions)

Rating

AAA

120

Aaa

AA

72

Aaa

B

50

Aa2

C

35

A2

D

11

Baa

Equity

12

Not rated

Total

300

  1. Using this CMO structure, explain the problem that is mediated through tranching as opposed to a simple pass-through security.
  2. Discuss the pros and cons of buying the Equity tranche as compared to the AAA tranche.

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