Question 1: Use the following tables to answers parts a & b:

Assume that $100 million face value of MBS were used to create the following tranches issued by Quick Money" SPV: Amount in million Bond Rating Aa1 Aa2 A1 A2 A3 Baa 1 Baa2 Baa3 Ba1 $ 30 $ 20 $ 10 $ 5 $ 5 $ 5 $ 5 $ 5 $ 5 $ 5 $ 5 Allocation in % Risk weights for CAR (APRA APS 120) 20% 20% 20% 20% 50% 50% 50% 100% 100% 100% 350% a) BIG Bank invested in the Quick Money Aaa and Ba1 tranch (see balance sheet. Calculate its risk weighted assets and evaluate if its capital buffer was consistent with a 10 percent minimum capital adequacy ratio at the time of the initial purchase. Assets Liabilities and equity Cash $10 Demand deposits $90 Quick Money Aaa tranche $15 Equity $10 Quick Money Ba1 tranche $5 Loans (risk weight 100%) $70 b) Show the changes in Small Banks' balance sheet once 15 percent of the Quick Money loan pool is written off. Check the impact upon the tranches and explain what problem Small Bank faces