QUESTION 2:

Consider the following Securitization structure of a pool of mortgages valued at $100 million:

Explain the waterfall principle and comment on the risk-return properties of the tranches in the securitization structure provided above.

What is the total of AAA-rated securities created in this structure?

Calculate the losses in the ABS-CDO resulting from a 10% loss to the asset portfolio.

Explain the response of the BCBS to securitization issues discovered during the global financial crisis.

Some ABS-CDO structures are subject to cliff risk. Define this risk and indicate whether it is likely to occur in the securitization structure provided above.