Explanation:
The tranches have a total value of $50 + 50 + 100 = ` million.
Since the value of collateral is $220 million, there is an overcollateralization of $20 million. Any losses will first be absorbed by this overcollateralization and then by the subordinated tranches.
For a $120 million loss, after using the overcollateralization, the two subordinated tranches will absorb the remaining loss and no loss will be incurred by the senior tranche.
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Q.2709 An ABS based on home equity loans is structured in the following manner:
| Subordinated tranche 1 | $50 million |
|---|---|
| Subordinated tranche 2 | $50 million |
| Senior tranche | $100 million |
| Collateral | $220 million |
What portion of a loss of $120 million will be absorbed by the senior tranche?
A
$120 million
B
$20 million
C
$0
D
$70 million
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