A portfolio of subprime mortgages has the following allocation of the principal to tranches:

senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the

same default rates.) An ABS CDO is then created from the mezzanine tranches with the same

allocation of principal. See the following table which list debt ratings for the different tranches

and for the tranches of the ABS CDO.

Tranche Debt rating

Senior AAA

Mezzanine BBB

Equity Unrated

Senior of ABS CDO ???

Mezzanine of ABS CDO BB

Equity of ABS CDO Unrated

What would be the best estimated rating for the Senior Tranche of ABS CDO?

A) AAA

B) AA or A

C) BBB or BB

D) B or CCC

E) Unrated