You hold a portfolio of mortgages $100.

If 5% of these morgages default, you will lose exactly $ . If 12% of these morgages default, you will lose exactly $

A bank has used $100 million morgages to create the following tranches: 45% on AAA, 25% on AA, 18% on A, 7% on BBB, 5% on equity tranche.

Imagine that you invest your $100 in the BBB tranch. If 5% of the underlying morgages default, you will lose exactly $ . If 12% of the underlying morgages default, you will lose exactly $. .