Reading 56: Asset-Backed Sector of the Bond Market-LOS e, (P 2010, Business, center, credit, style

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Session 15: Fixed Income: Structured Securities
Reading 56: Asset-Backed Sector of the Bond Market

LOS e, (Part 2): Describe the cash flow and prepayment characteristics for securities backed by student loans, Small Business Administration (SBA) loans, and credit card receivables.

 

 

 

Which of the following regarding student loan asset-backed securities (SLABs) is least accurate?

A) Federal Family Education Loan Program (FFELP) loans are guaranteed up to 98% of principal and accrued interest.

B) The borrower makes no payment during the deferment period and no interest accrues.

C) Alternative loans are securitized and guaranteed by the U.S. government.

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With U.S. government FFELP loans, the government guarantees of up to 98% of principal and accrued interest. Alternative loans (student loans not in the FFELP) are securitized, but not guaranteed by the U.S. government. In general, there are three periods with SLABs. During the deferment period, the borrower makes no payments and the loan accrues no interest. During the grace period, the borrower makes no payments but the loan accrues interest. During the loan repayment period, the borrower makes principal and interest payments based on a reference rate plus margin.

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Which of the following statements regarding student loan asset-backed securities (SLABs) is FALSE?

A) Interest accrues on the loan during the deferment period.

B) Loan repayments are based on a reference rate plus a margin.

C) Prepayments occur when government guarantees are paid in the case of defaults.

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In student loan asset-backed securities (SLABs), there are three periods. During the deferment period, the borrower makes no payments and the loan accrues no interest. During the loan repayment period, the borrower makes principal and interest payments based on a reference rate plus margin. Prepayments may occur because government guarantees are paid when there are defaults.

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Which of the following statements regarding Small Business Administration (SBA) loan-backed securities is least accurate?

A) Prepayments on SBA loans are not passed through.

B) SBA loans are backed by the credit of the U.S. government.

C) Most SBA loans are based on the prime rate.

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SBA loans are backed by the credit of the U.S. government. Most SBA loans are variable rate, where the rate is based on prime and reset monthly or quarterly. The investor receives three cash flows: interest, principal repayment and principal prepayments.

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Which of the following statements regarding Small Business Administration (SBA) loan-backed securities is FALSE?

A) Pooled SBA loans are fairly heterogeneous.

B) Loan payments are based on the reference rate at the beginning of each period.

C) The interest rate on SBA loans is reset monthly or quarterly.

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Pooled Small Business Administration (SBA) loans must have similar terms and features. SBA loan payments are based on the reference rate at the beginning of each period.

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Which of the following statements regarding credit card receivable-backed securities is FALSE?

A) Credit card receivable-backed securities pay principal and interest each payment just like a mortgage-backed security.

B) Credit card receivable-backed securities use a master trust structure.

C) The cash flow to the pool of credit card receivables consists of finance charges, fees, and principal repayment.

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Credit card receivable-backed securities do not pay principal and interest each payment just like a mortgage-backed security. Interest is paid periodically and principal is placed under a lockout period.

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Which of the following is referred to as principal-amortization period for a credit card receivable-backed security? The principal-amortization period is the period during which the:

A) principal is reinvested.

B) principal is no longer reinvested, but paid to investors.

C) interest is reinvested.

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Since credit card balances are revolving, principal is not amortized. As such, interest on credit card ABSs is paid periodically and the principal is placed under a “lockout period,” during which time no principal is paid to the ABS holders. Principal payments made during the lockout period are used to purchase additional underlying assets or receivables. Once the lockout period ends, principal payments are passed on to the security holders. This post-lockout period is known as the “principal amortization period.”

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Which of the following is TRUE concerning the early amortization trigger for a credit card receivable-backed security? An early amortization trigger leads to:

A) partial default.

B) credit card tranches being retired sequentially.

C) the principal payments made by credit card holders being reinvested in receivables.

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The most frequent trigger is when the 3-month average excess spread earned on the receivables falls to zero or less. When this happens, prepayments are used to retire credit card tranches sequentially, instead of using them to purchase more receivables.