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Explanation:
Option C is false. Mezzanine tranches are typically "thin" (representing a narrow slice of the capital structure) rather than thick. Because it is thin, a mezzanine tranche can be wiped out quickly once defaults breach its attachment point, giving it a risk profile that does not resemble a bell-curve-shaped loss distribution. Options A, B, and D are true statements regarding securitization risks.
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315.2. In the three-tiered (senior bond, mezzanine, and equity tranche) securitization structure, Malz¹⁶ tends to measure the risk of a tranche by its 95% and/or 99% Credit VaR. In regard to tranche risks, each of the following is true EXCEPT which is false?
A
Credit VaR is the worst-case loss at the 0.05 or 0.01 quantile minus the expected loss (EL.)
B
High systemic risk can be expressed as high default correlation, which tends to increase the risk (Credit VaR) of senior bonds
C
Because the mezzanine tranche is thick, at high correlations and high default rates, the mezzanine tranche behaves like the senior bond with a bell-curve-shaped loss distribution
D
An increase in granularity can significantly diminish securitization risk