Final Exam

In each issue of Wharton Magazine, we’ll test your knowledge with a question taken straight from an actual Wharton course exam. Submit the correct answer and you might just walk off with a great prize—a Wharton Executive Education program.

This issue’s Final Exam question comes from Todd Sinai, Associate Professor of Real Estate and Business and Public Policy. Professor Sinai sent along a question about everyone’s favorite topic: Mortgage-backed securities. Good luck—and remember … real estate is all about location, location, location.

The Basics:
Commercial Mortgage-Backed Securities (CMBS) are created by pooling commercial loans varying in size, property type and location, and then transferring those pools to a trust. The trust then slices the pool of mortgages into tranches, which are underwritten and issued as a series of bonds. (Note: A tranche is a single issue of a security released at different times. The originator is the entity that made the original loans.)

Sales of CMBS averaged approximately $75 billion a year from 2000 to 2004. Sales were $179 billion in 2005, $221 billion in 2006 and $248 billion in 2007. But according to, sales of CMBS dropped to $11.15 billion in 2008.

The Question:
Is the following statement true, false or uncertain?

Bond purchasers should be willing to pay more for a CMBS tranche if the originator of the underlying mortgages buys all of the most subordinate tranche.

The Answer: True 

Thanks for playing!

One winner will be selected to attend, tuition-free, one Executive Education, 3- to 5-day open enrollment program.

Does not include travel, expenses or personal costs incurred; subject to availability and admissions criteria; excludes the Advanced Management Program, Executive Development Program, Essentials of Management, Health Care, Industry-Specific and Global Programs.

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