QUESTION: TRANCHES 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 Baa1 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% Assets Cash Liabilities and equity $10 Demand deposits $90 $15 Equity $10 $5 $70 Quick Money Aaa tranche Quick Money Ba1 tranche Loans (risk weight 100%) e) Recall that loans have a regulatory risk weight of 100%. Imagine the Clever Bank has $100m loans, which it could sell to its own SPV Quick Money. Quick Money can structure the cash flows from the $100m loans to create the following tranches: Bond Amount in million Risk weights RWA in $m for the Rating for CAR bank buying the (APRA APS whole tranche 120) $ 30 20% Aa1 $ 20 20% Aa2 $ 10 20% $ 5 20% A1 $ 5 50% A2 $ 5 50% A3 $ 5 50% Baa 1 $ 5 100% Baa2 $ 5 100% Baa3 $ 5 100% Ba1 $ 5 350% Total Comment if it is worth for Clever Bank to sell its loans to Quick Money and then buy all tranches that Quick Money created. QUESTION: TRANCHES 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 Baa1 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% Assets Cash Liabilities and equity $10 Demand deposits $90 $15 Equity $10 $5 $70 Quick Money Aaa tranche Quick Money Ba1 tranche Loans (risk weight 100%) e) Recall that loans have a regulatory risk weight of 100%. Imagine the Clever Bank has $100m loans, which it could sell to its own SPV Quick Money. Quick Money can structure the cash flows from the $100m loans to create the following tranches: Bond Amount in million Risk weights RWA in $m for the Rating for CAR bank buying the (APRA APS whole tranche 120) $ 30 20% Aa1 $ 20 20% Aa2 $ 10 20% $ 5 20% A1 $ 5 50% A2 $ 5 50% A3 $ 5 50% Baa 1 $ 5 100% Baa2 $ 5 100% Baa3 $ 5 100% Ba1 $ 5 350% Total Comment if it is worth for Clever Bank to sell its loans to Quick Money and then buy all tranches that Quick Money created