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A bank pools 200 mortgages worth 250000 each and paying an annual interest rate of 10% into a collateralised debt obligation, which it divides into
A bank pools 200 mortgages worth 250000 each and paying an annual interest
rate of 10% into a collateralised debt obligation, which it divides into three
tranches: a junior tranche that absorbs the first 5% of losses, a mezzanine
trance that absorbs the next 4% and a senior tranche that absorbs losses only
if the default rate exceeds 9%. Suppose 15 mortgages default. What will the
cash flow of the mezzanine tranche be?
(a) 150,000.
(b) 120,000
(c) 75,000.
(d) 0
The answer is B, how to calculate it?
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