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Risk Management and Investment
Risk Management and Investment
Hard
A CDO has a $500 million collateral pool with three tranches: equity (0-5%, $25M), mezzanine (5-15%, $50M), and senior (15-100%, $425M). If defaults cause total pool losses of 12%, which statement about tranche losses is correct?
A
The equity tranche loses 100% ($25M), the mezzanine tranche loses 70% ($35M), and the senior tranche loses nothing
B
Each tranche absorbs losses proportionally — equity loses $1.5M, mezzanine $3M, senior $55.5M
C
The equity tranche loses 60% ($15M), the mezzanine loses 40% ($20M), and the senior loses $25M
D
The equity tranche loses 100%, the mezzanine loses 100%, and the senior begins absorbing losses
Select an answer to continue
Tags
#cdo
#tranching
#loss-waterfall
#attachment-point
#structured-credit
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FRM Part II — Risk Management and Investment Practice Question | AcadiFi | AcadiFi