The investment bank plans to create a collateralized mortgage obligation (CMO) from the mezzanine tranche of the MBS. The principal assigned to the senior, mezzanine, and equity tranches of the CMO differ from that assigned to the MBS; the credit ratings and coupon rates for the CMO are the same as for the MBS. The principal from the mezzanine tranche of the MBS will be allocated as follows: 65% will go to the senior tranche (rated AAA and earning 2.75%), 25% will go to the mezzanine tranche (rated A and earning 3.75%), and the remainder will go to the equity tranche (rated CCC). All of this information is represented in the diagram and table below.

		CMO Principal Allocation	Rate
Senior tranche		65.00%	2.75%
Mezzanine tranche		25.00%	3.75%
Equity tranche		10.00%

Suppose that the economy experiences a real estate crisis, prices drop, and many of the original borrowers decide to default on their mortgages and abandon their homes. Complete the table below to show the estimated losses to the three tranches of the CMO.

Losses on underlying assets	Losses to mezzanine tranche of MBS	Losses to equity tranche of CMO	Losses to mezzanine tranche of CMO	Losses to senior tranche of CMO
10.0%
12.5%
15.0%
17.5%
20.0%

Assets MBS CMO Mortgages Principal: 100% Coupon rate: 4.80% Senior tranche Principal: 70% Coupon rate: 2.75% Senior tranche Principal. 65% Coupon rate: 2.75% Mezzanine tranche Principal. 25% Coupon rate: 3.75% Mezzanine tranche Principal 20% Coupon rate: 3.75% Equity tranche Principal: 10% Equity tranche Principal: 10%