Lundberg Case Scenario
John Lundberg, CFA, is a fixed income manager who is talking to a potential client, Brandy Wing, about asset backed bonds.
Wing: I am new to asset backed securities (ABS) and given all of the problems lately with these securities I am trying to figure out who the players are. Excluding third parties, who is primarily involved in the securitization? Lundberg: The three main parties to the transaction are the seller or originator, the servicer, and the insurer. Wing: Can you explain the different characteristics of amortizing and non-amortizing assets in securitizations?
Lundberg: Amortizing assets require periodic payments of principal and interest, while non- amortizing assets’ periodic payments consist solely of the interest due. Collateral for secured amortizing assets does not change in composition, but the composition of collateral for secured non-amortizing assets does change. All principal repayments from the collateral are distributed as received to the security holders for amortizing assets, but only after the lockout period for non-amortizing assets.
Wing: Can you explain credit tranching? Lundberg: The benefit of credit tranching is that defaults are absorbed by the subordinate tranche, but any subsequent prepayments are distributed to that tranche in order to recover the loss.
Wing: For many years I have invested in muni bonds and would like a bond with credit enhancement. Lundberg: With an ABS, you have three forms of protection available. Insurance provides for payment of interest and principal of a specified percentage of the par value at origination should the issuer fail to make the payments. With overcollateralization, the value of the collateral exceeds the amount of the par value of the outstanding securities issued at par. Excess spread reserves are created when cash inflows exceed payments to investors and other parties and are set aside to pay for potential future losses.
Wing: Can you tell me why collateralized debt obligations (CDOs) are issued?
Lundberg: CDOs are categorized based upon the motivation of the sponsor. In a balance sheet motivated transaction, the sponsor seeks to remove debt instruments from its balance sheet.
The motivation in an arbitrage transaction is for the sponsor to earn the spread between the yield offered on the debt obligations in the underlying pool and the payments made to the various tranches in the structure.
Wing: Can you explain differences between cash and synthetic CDOs?
Lundberg: Cash CDO investors have legal ownership of the underlying pool of assets. Synthetic CDO investors have only economic exposure to the underlying assets. Unlike cash CDOs, synthetic CDO structures do not have subordinate/equity tranches.
7. Lundberg’s statement about the parties in a securitization is incorrect with respect to:
A. Insurers
B. Servicers
C. Originators
Answer: A
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 401-403 Study Session 15-58-a Illustrate the basic structural features of and parties to a securitization transaction.
The main parties to a securitization are the seller or originator, the servicer, and the issuer or SPV.
8. Which one of Lundberg’s comments about amortizing and non-amortizing assets is correct?
A. Periodic payments
B. Principal repayments
C. Collateral composition
Answer: B
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 405-407 Study Session 15-58-c Distinguish between the payment structure and collateral structure of a securitization backed by amortizing assets and non-amortizing assets.
Non-amortizing assets, prior to the lockout or revolving period, principal repayments can be either paid out to security holders or reinvested in additional loans.
9. Is Lundberg’s explanation of credit tranching correct?
A. Yes
B. Only with respect to the treatment of defaults.
C. Only with respect to the treatment of prepayments.
Answer: B
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 403-405 Study Session 15-58-b Explain and contrast prepayment tranching and credit tranching. The purpose of credit tranching is for the subordinate tranche to absorb credit losses.
10. Which of Lundberg’s comments about the types of credit enhancements is incorrect?
A. Insurance
B. Excess spread
C. Overcollaterization
Answer: A
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 407-409 Study Session 15-58-d Distinguish among the various types of external and internal credit enhancements.
The insurance protection provides for the timely payment of principal and interest payments as due.
11. Are Lundberg’s comments about the motivations for creating CDOs correct?
A. Yes
B. No, only the comment concerning arbitrage transactions.
C. No, only the comment concerning balance sheet transactions.
Answer: A
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 427-435 Study Session 15-58-g
Distinguish among the primary motivations for creating a collateralized debt obligation (arbitrage and balance sheet transactions).
Both comments are correct.
12. Which of Lundberg’s comments about differences between cash and synthetic CDOs is incorrect?
A. Subordinate/equity tranches
B. Legal ownership of underlying assets
C. Economic exposure to underlying asset
Answer: A
“Asset-Backed Sector of the Bond Market,” Frank J. Fabozzi, CFA 2009 Modular Level II, Volume 5, pp. 432-434 Study Session 15-58-f Describe a collateralized debt obligation (CDO) and the different types (cash and synthetic).
Both cash and synthetic CDOs have subordinate/equity tranches. | 
发表于 2009-7-1 16:47
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