Performance of the tranches for bad asset backed securities

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Reference no: EM132010591

There are asset backed securities with 10% in the equity tranche, 10% in the mezzanine tranche, and 80% in the senior tranche. The mezzanine tranches are repackaged to form CDOs with 10% equity tranches, 20% mezzanine tranches, and 70% senior tranches. What are the losses in each of the tranches of the ABSs and the CDOs when the losses of 1 the underlying assets are uniform across all the assets and equal to 12%? What about if the losses are 15%, 20%, or 25%? Now imagine a CDO and group of ABS’s feeding into the CDO with the same tranche structure, but instead of the assets having uniform losses 30% of the asset backed securities have losses of 25% and the rest of the asset backed securities have losses of only 5%. Compare the performance of the tranches for the bad asset backed securities, the good asset backed securities, and the CDO.

Reference no: EM132010591

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