Suppose that $\frac{?}{\text{A}\text{B}\text{S}}$ s are created from portfolios of subprime mortgages with the

following allocation of the principal to tranches: senior $5\%($rated AAA$),$

mezzanine $0\mathrm{.}1\%($rated BBB$),$ and equity $5\%($rated C$).$ The portfolios of

subprime mortgages have the same default rates. An ABS CDO is then created

from the mezzanine tranches. Which of the following is true?

The ABS CDO tranches are almost worthless because the mezzanine tranches are so

thin

The ABS CDO tranches should have ratings ranging from AAA to $C$

The ABS CDO tranches should all be rated BBB

The ABS CDO tranches should all be rated $C$