Three made up of three identical mortgages

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1. Consider a CDO made up of three made up of three identical mortgages of $1,000.00. Assume that the probability of any mortgage defaulting is p, all defaults are independent, and that the recovery rate is zero. Call the first to default tranche of the CDO L1, the second L2, etc. L1 bears the first $1,000.00 of losses, L2 the next $1,000.00, etc. For a security to be considered AAA, the probability of a total loss has to be less than 3%. What is the highest value for p that would still make Tranche L3 be rated AAA? a) 3%; b) 25% c) 21% d) 31%   (Please show all work, no credit given for no work)

2. Which of these companies is not an NRSRO? a) Moody's; b) Goldman Sachs; c) Egan-Jones; d) Standard and Poor's

3. The majority of subprime mortgages were: a) issued by Fannie and Freddy; b) given to buyers with credit scores above 700; c) floating rate; d) transformed into Alt A as the housing prices fell

4. Over the last 40 years, housing prices have: a) risen more slowly than the stock market; b) received unfair tax treatment; c) benefited from eliminating the GSE's; d) grown more slowly in cities

Reference no: EM131447459

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