Calculating losses in tranchesTo the right is a graphic representation of a CDO.Lets say there is a loss of 10% on the underlyingassets, in our case subprime mortgages, how doyou calculate losses in different tranches1. Figure out the losses on underlying assets:in our case 10%2. Allocate loss to original senior tranche:O Senior: 0.80 x 0.10 = 8%3. Allocate losses to mezzanine tranche:OO4. Break down the mezzanine tranche into CDO tranches:The senior CDO tranche: 0.65 x 7% = 4.55OAssetsOSenior Tranche (80%)AAAÖMezzanine Tranche (15%)BBBThe mezzanine tranche has an allocation of 15%, however, since it is subordinate(waterfall payment system), it only absorbs losses after the senior tranche hasabsorbed its 80% share. Calculation: 15% - 8% = 7%20Equity Tranche (5%)Not RatedThe mezzanine tranche: 0.25 x 7% = 1.75The equity tranche: 7% - 4.55% -1.75% = 0.7% (or 0.1 x 7% = 0.7%)The mezzanine tranche isrepackaged with othermezzanine tranchesSenior Tranche (65%)AAAMezzanine Tranche(25%) BBBEquity Tranche (10%)

Figure out the losses on the underlying assets: In this case, it's 10%.Allocate the loss of the…

1. Figure out the losses on underlying assets: in our case 10% 2. Allocate loss to original senior tranche: Senior: 0.80 x 0.10 = 8% 3. Allocate losses to mezzanine tranche: O The mezzanine tranche has an allocation of 15%, however, since it is subordinate (waterfall payment system), it only absorbs losses after the senior tranche has absorbed its 80% share. Calculation: 15% - 8% = 7% 4. Break down the mezzanine tranche into CDO tranches: The senior CDO tranche: 0.65 x 7% = 4.55 The mezzanine tranche: 0.25 x 7% = 1.75 The equity tranche: 7% - 4.55% -1.75% = 0.7% (or 0.1 x 7% = 0.7%) O Equity Tranche (5%) Not Rated O O

1. Figure out the losses on underlying assets: in our case 10% 2. Allocate loss to original senior tranche: Senior: 0.80 x 0.10 = 8% 3. Allocate losses to mezzanine tranche: O The mezzanine tranche has an allocation of 15%, however, since it is subordinate (waterfall payment system), it only absorbs losses after the senior tranche has absorbed its 80% share. Calculation: 15% - 8% = 7% 4. Break down the mezzanine tranche into CDO tranches: The senior CDO tranche: 0.65 x 7% = 4.55 The mezzanine tranche: 0.25 x 7% = 1.75 The equity tranche: 7% - 4.55% -1.75% = 0.7% (or 0.1 x 7% = 0.7%) O Equity Tranche (5%) Not Rated O O

Database System Concepts

7th Edition

ISBN:9780078022159

Author:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan

Publisher:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan

Chapter1: Introduction

Section: Chapter Questions

Problem 1PE

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Concept explainers

Transaction Processing

Transaction processing is a computational style generally performed by server computers, which supports interactive applications (apps). Transaction processing is also known as information processing, which divides the work into indivisible and individual operations called transactions. The transaction is a set of tasks; a single task is considered as the minimum processing unit that cannot be divided again.

Question

Calculating losses in tranches
To the right is a graphic representation of a CDO.
Lets say there is a loss of 10% on the underlying
assets, in our case subprime mortgages, how do
you calculate losses in different tranches
1. Figure out the losses on underlying assets:
in our case 10%
2. Allocate loss to original senior tranche:
O Senior: 0.80 x 0.10 = 8%
3. Allocate losses to mezzanine tranche:
O
O
4. Break down the mezzanine tranche into CDO tranches:
The senior CDO tranche: 0.65 x 7% = 4.55
O
Assets
O
Senior Tranche (80%)
AAA
Ö
Mezzanine Tranche (15%)
BBB
The mezzanine tranche has an allocation of 15%, however, since it is subordinate
(waterfall payment system), it only absorbs losses after the senior tranche has
absorbed its 80% share. Calculation: 15% - 8% = 7%
20
Equity Tranche (5%)
Not Rated
The mezzanine tranche: 0.25 x 7% = 1.75
The equity tranche: 7% - 4.55% -1.75% = 0.7% (or 0.1 x 7% = 0.7%)
The mezzanine tranche is
repackaged with other
mezzanine tranches
Senior Tranche (65%)
AAA
Mezzanine Tranche
(25%) BBB
Equity Tranche (10%)

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