Consider three bonds X, Y , and Z, each of which pays $1000 if it does not default, and nothing in case of default. The default probabilities are 0.3, 0.2, and 0.1 respectively, and the default correlations are all zero. These bonds are bundled together to form an asset pool, and a prioritized structure of claims (tranches) against this pool are issued. There are three tranches (senior, mezzanine, and junior), each of which promise $1000. If there are insufficient funds to make all promised payments, then all losses are applied first to the junior tranche, then to the mezzanine, and finally to the senior tranche.
Consider three bonds X, Y , and Z, each of which pays $1000 if it does not default, and nothing in case of default. The default probabilities are 0.3, 0.2, and 0.1 respectively, and the default correlations are all zero. These bonds are bundled together to form an asset pool, and a prioritized structure of claims (tranches) against this pool are issued. There are three tranches (senior, mezzanine, and junior), each of which promise $1000. If there are insufficient funds to make all promised payments, then all losses are applied first to the junior tranche, then to the mezzanine, and finally to the senior tranche.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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What is the default probabilty of the mezzanine tranche?
Transcribed Image Text:Consider three bonds X, Y, and Z, each of which pays $1000 if it does not default, and
nothing in case of default. The default probabilities are 0.3, 0.2, and 0.1 respectively,
and the default correlations are all zero.
These bonds are bundled together to form an asset pool, and a prioritized structure
of claims (tranches) against this pool are issued. There are three tranches (senior,
mezzanine, and junior), each of which promise $1000. If there are insufficient funds
to make all promised payments, then all losses are applied first to the junior tranche,
then to the mezzanine, and finally to the senior tranche.
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Step 1
Bonds are interest-paying securities that are issued by a corporation or the government.
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