Suppose that an ABS is created from a portfolio of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. Losses on the mortgage portfolio prove to be 16%

What, as a percent of tranche principal, are losses on the mezzanine tranche of the ABS
A. 50%
B. 60%
C. 80%
D. 100%

B

10% out of the 16% loss is absorbed by the equity tranche. The remaining 6% is absorbed by the mezzanine tranche. The total size of the mezzanine tranche is 10%. It is therefore 60% wiped out.