9,5 In order to sell the mortgage-backed securities to the pension fund managers (who require low-risk securities) and hedge fund managers (who require high-yield securities), the investment bank decides it will need to turn the MBSs into collateralized debt obligations that are segmented into three tranches. The first tranche investors get paid before the investors in the remaining two tranches, the second tranche investors get paid after the first tranche investors and before the third tranche investors, and the third tranche investors get paid after the investors in the other two tranches. The following tables outline the payment order, yields, and ratings of each of the tranches within three CDOs that the investment bank could create. Using the tables, answer the questions that follow. CDO 1 Tranche Payment Order Yield Rating 1 First 3% AAA 2 Second 10% BBB 3 Third 15% CCC CDO 2 Tranche Payment Order Yield Rating 1 First 7% BBB 2 Second 13% CCC 3 Third 14% CC CDO 3 Tranche Payment Order Yield Rating 1 First 3% AA 2 Second 7% BBB 3 Third 8% BB Which CDO would be most appealing to pension fund managers? CDO 1 CDO 2 CDO 3 Which tranche in that CDO would be most appealing to pension fund managers? Tranche 1 Tranche 2 Tranche 3 Which CDO would be most appealing to hedge fund managers? CDO 1 CDO 2 CDO 3 Which tranche in that CDO would be most appealing to hedge fund managers? Tranche 1 Tranche 2 Tranche 3 Based on your answers to the previous questions, which CDO should the investment manager create so that both classes of investors will purchase the securities? CDO 1 CDO 2 CDO 3
9,5 In order to sell the mortgage-backed securities to the pension fund managers (who require low-risk securities) and hedge fund managers (who require high-yield securities), the investment bank decides it will need to turn the MBSs into collateralized debt obligations that are segmented into three tranches. The first tranche investors get paid before the investors in the remaining two tranches, the second tranche investors get paid after the first tranche investors and before the third tranche investors, and the third tranche investors get paid after the investors in the other two tranches. The following tables outline the payment order, yields, and ratings of each of the tranches within three CDOs that the investment bank could create. Using the tables, answer the questions that follow. CDO 1 Tranche Payment Order Yield Rating 1 First 3% AAA 2 Second 10% BBB 3 Third 15% CCC CDO 2 Tranche Payment Order Yield Rating 1 First 7% BBB 2 Second 13% CCC 3 Third 14% CC CDO 3 Tranche Payment Order Yield Rating 1 First 3% AA 2 Second 7% BBB 3 Third 8% BB Which CDO would be most appealing to pension fund managers? CDO 1 CDO 2 CDO 3 Which tranche in that CDO would be most appealing to pension fund managers? Tranche 1 Tranche 2 Tranche 3 Which CDO would be most appealing to hedge fund managers? CDO 1 CDO 2 CDO 3 Which tranche in that CDO would be most appealing to hedge fund managers? Tranche 1 Tranche 2 Tranche 3 Based on your answers to the previous questions, which CDO should the investment manager create so that both classes of investors will purchase the securities? CDO 1 CDO 2 CDO 3
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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Transcribed Image Text:9,5 In order to sell the mortgage-backed securities to the pension fund managers (who require low-risk securities) and
hedge fund managers (who require high-yield securities), the investment bank decides it will need to turn the MBSs into
collateralized debt obligations that are segmented into three tranches. The first tranche investors get paid before the
investors in the remaining two tranches, the second tranche investors get paid after the first tranche investors and before
the third tranche investors, and the third tranche investors get paid after the investors in the other two tranches.
The following tables outline the payment order, yields, and ratings of each of the tranches within three CDOs that the
investment bank could create.
Using the tables, answer the questions that follow.
CDO 1
Tranche Payment Order Yield Rating
1
First
3%
AAA
2
Second
10%
BBB
3
Third
15% CCC
CDO 2
Tranche Payment Order Yield Rating
1
First
7% BBB
2
Second
13%
CCC
3
Third
14% CC
CDO 3
Tranche Payment Order Yield Rating
1
First
3% AA
2
Second
7%
BBB
3
Third
8%
BB
Which CDO would be most appealing to pension fund managers?
CDO 1
CDO 2
CDO 3
Which tranche in that CDO would be most appealing to pension fund managers?
Tranche 1
Tranche 2
Tranche 3
Which CDO would be most appealing to hedge fund managers?
CDO 1
CDO 2
CDO 3
Which tranche in that CDO would be most appealing to hedge fund managers?
Tranche 1
Tranche 2
Tranche 3
Based on your answers to the previous questions, which CDO should the investment manager create so that both classes
of investors will purchase the securities?
CDO 1
CDO 2
CDO 3
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