1. How were the risks in ABS CDOs misjudged by the market?
2. What is meant by the term ‘‘agency costs''? How did agency costs play a role in the credit crisis?
3. How is an ABS CDO created? What was the motivation to create ABS CDOs?
4. Explain the impact of an increase in default correlation on the risks of the senior tranche of an ABS. What is its impact on the risks of the equity tranche?
5. Explain why the AAA-rated tranche of an ABS CDO is more risky than the AAA-rated tranche of an ABS.