X (b) Now consider another extreme case where the defaults of the two bonds are perfectly correlated. That is, whenever one bond defaults, the other bond defaults too. Find the par value of the senior and equity tranches. (8 marks) (c) Subprime Mortgages Senior Tranches (75%) AAA Senior Tranche (75%) Mezzanine Tranches (20%) AAA BBB Mezzanine Tranche (20%) 88B Equity Tranches (5%) Not Rated Equity Tranche (5%) Suppose an ABS is created from subprime mortgages (as illustrated in the middle picture in the above graph). An ABS CDO is subsequently created out of the mezzanine tranche of the ABS (see the rightmost picture above). Fill in the table below. Please show your calculations. (10 marks) Losses on Losses on mezzanine Losses on equity Losses on mezzanine Losses on senior subprime mortgages tranche of ABS tranche of ABS CDO tranche of ABS CDO tranche of ABS CDO 8% 12% 16% 20% 24% Close