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In a mortgage-backed security 80% of the principal is assigned to the senior tranche, 15% to the mezzanine tranche, and 5% to the equity tranche.
In a mortgage-backed security 80% of the principal is assigned to the senior tranche, 15% to the mezzanine tranche, and 5% to the equity tranche. A CDO is created from the mezzanine tranche (along with other mezzanine tranches of identical MBSs), in which 65% of the principal is assigned to the senior tranche, 25% to the mezzanine tranche, and 10% to the equity tranche. What losses will be incurred on the mezzanine tranche of the CDO if the underlying mortgages incur losses of 9%?
A. 25.0%
B. 33.3%
C. 50.0%
D. 66.7%
E. 100.0%
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