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Fixed Income【Reading 52】Sample

Which of the following statements regarding the basic structure of an asset-backed security (ABS) is least accurate?
A)
The seller and the servicer of the ABS are always the same entity.
B)
Corporate bonds and emerging market bonds can be collateralized to create an ABS.
C)
The flow of funds from the underlying loan, through the servicer and issuer and finally to the investor, is called the waterfall.



The two separate functions of seller and servicer of an ABS can be performed by either two different entities or the same entity.

Carco Motor Company is an automobile manufacturer that is in the process of creating asset-backed securities (ABS) by utilizing a pool of loans from cars the company had financed for its customers and selling them to a separate legal entity. The issuer of the ABS is also referred to as:
A)
a special purpose vehicle.
B)
the seller/servicer.
C)
a bankruptcy-remote entity.



A special purpose vehicle (SPV) is established for each securitization of loans. The loans are sold to the SPV, which in turn is the entity which issues the ABS.

TOP

Within an asset-backed security structure, the entity which collects the principal and interest payments from the borrower and, when necessary, sends out delinquency notices is the:
A)
issuer.
B)
servicer.
C)
seller.



The servicer is responsible for processing the payments received on the underlying loan collateral, and remitting the resulting cash flows to the investors in the ABS.

TOP

Which of the following types of assets are least likely to be securitized as asset-backed securities (ABS)?
A)
Auto loans.
B)
Insurance policies.
C)
Home equity lines of credit.



Insurance policies are not assets securitized in ABS structures. Home equity lines of credit and auto loans are often securitized.

TOP

Prepayment tranching refers to:
A)
subdividing a corporate bond so some components pay coupon and others pay principal.
B)
subdividing an asset or mortgage backed security so some components are exposed to more prepayment risk than others.
C)
subdividing a corporate bond so some components pay earlier coupon payments than others.



Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others.

TOP

Prepayment tranching is also referred to as:
A)
serial tranching.
B)
credit tranching.
C)
time tranching.



Prepayment tranching is also referred to as time tranching. Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others.

TOP

The most common form of credit enhancement for asset backed securities is:
A)
corporate guarantees.
B)
cash reserve funding.
C)
credit tranching.



Credit tranching is the most common form of credit enhancement for asset-backed securities. In credit tranching, bonds are divided into senior and subordinated sections. In this senior-subordinated structure, subordinated bonds absorb losses up to their par value after which losses are absorbed by senior bonds.

TOP

Which of the following is NOT a feature of an asset-backed security backed by non-amortizing assets?
A)
The composition of the underlying loans does not change.
B)
During a lockout period, principal payments are not distributed to the bondholders.
C)
A call provision can be triggered when collateral reaches a certain level.



In an asset-backed security backed by non-amortizing assets (e.g. credit cards), the composition of loans in the pool will change. During the lockout period, principal payments are not distributed to bondholders. Instead, new loans are purchased and this structure is referred to as a revolving structure. However, the retirement of principal (i.e. a call provision) in a revolving structure can be triggered by several different events. These events include a specific date, when the collateral falls below a certain level, or when cumulative losses in the collateral reach a certain level.

TOP

Which of the following statements regarding the structure of asset-backed securities (ABS) backed by amortizing assets is least accurate?
A)
An example of this ABS is that backed by automobile loans.
B)
A lockout period results in a revolving structure.
C)
No new loans are added to the pool.



In an asset-backed security backed by amortizing assets (e.g. automobile loans), the composition of loans in the pool will not change. No new loans are purchased. A lockout period provision refers to an ABS backed by non-amortizing loans.

TOP

Suppose an investor did not want to be concerned with the risk of having to reinvest the early repayment of principal. What type of security should he invest in? A security backed by:
A)
non-amortizing assets.
B)
amortizing assets.
C)
automobile loans.



In security backed by non-amortizing assets (e.g. credit cards), early repayment of the principal will not be distributed to investors during the lockout period. Instead, new loans will be purchased. In a security backed by amortizing assets (e.g. automobile loans or mortgages), principal repayments can be distributed to investors.

TOP

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