Suppose that mezzanine tranches of the ABS CDOs, similar to those in Figure 8.3, are
Chapter 8, Problem 8.18(choose chapter or problem)
Suppose that mezzanine tranches of the ABS CDOs, similar to those in Figure 8.3, are resecuritized to form what is referred to as a CDO squared. As in the case of tranches created from ABSs in Figure 8.3, 65% of the principal is allocated to a AAA tranche, 25% to a BBB tranche, and 10% to the equity tranche. How high does the loss percentage have to be on the underlying assets for losses to be experienced by a AAA-rated tranche that is created in this way. (Assume that every portfolio of assets that is used to create ABSs experiences the same loss rate.)
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