23. The secured debt holders, therefore, can be said to be subject only to correlation risk.

24. They are, therefore, exposed to outright risk, not to correlation risk.

25. Let’s alter the structure just a bit. Assume the retail business can only cover the senior debt. The firm’s balance sheet is simple: the sum of the two bonds’ face value equal the sum of the values of the core business and real estate (i.e., in default scenarios the equity cushion vanishes). Again, the senior/secured bondholders only lose in Scenario IV. But now the subordinated bondholders will lose in every situation but the first. Hence the punch line: if the two assets are perfectly negatively correlated, the subordinated debt holders always lose! Said another way, the more negatively correlated, the greater is the risk, a key notion in structured credit products such as collateralized debt obligations.