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Test Bank: Chapter 8
Securitization and the Credit Crisis of 2007
1. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 75%, mezzanine 20%, and equity 5%. An
ABS CDO is then created from the mezzanine tranches with the same allocation of
principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of
tranche principal, are losses on
(i) The equity tranche of the ABS
____ __
(ii) The mezzanine tranche of the ABS _ _ _ _ _ _
(iii)The senior tranche of the ABS _ _ _ _ _ _
(iv)The equity tranche of the ABS CDO _ _ _ _ _ _
(v) The mezzanine tranche of the ABS CDO
(vi)The senior tranche of the ABS CDO
______
______
2. Which of the following would tend to lead to an increase in house prices (Circle two)
(a) A reduction in interest rates
(b) Regulators specifying a maximum level for the loan-to-value ratio on mortgages
(c) Banks reducing the minimum FICO that borrowers are required to have
(d) An increase in foreclosures
3. When a mortgage is non-recourse (Circle one)
(a) The house buyer can lose all possessions if he or she is unable to make payments
(b) The purchaser has a free American style put option on the house
(c) The purchaser has a free European style put option on the house
(d) The lender is less likely to lose money on the mortgage