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2、Which of the following is the typical way an asset manager employs interest rate swaps in subprime securitized pools?

A) Short-term, pay fixed swap.

B) Long-term, pay fixed swap.

C) Short-term, receive fixed swap.

D) Long-term, receive fixed swap.

likaiba

 

The correct answer is D

First, the fixed portion of subprime hybrid loans are short-term, typically 2 to 3 years. The floating portion is long-term. Second, the bank reduces its exposure to a floating rate inflow (asset) by entering into a pay-floating, receive-fixed swap.

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AIM 5: Explain the structure of the securitization process of the subprime mortgage loans.

1、Investors in subprime securitized mortgage pools are protected from losses by all of the following methods EXCEPT:

A) Subordination of senior tranche.

B) Excess spread.

C) Performance triggers.

D) Interest rate swaps.

likaiba

 

The correct answer is A

Subordination of equity tranches provides protection to investors by absorbing first losses.

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2、Risk and return of subprime securitized tranches is best characterized by:

      Claim            Risk

A) Senior             Moderate

B) Mezzanine         Moderate

C) Equity             Low

D) Mezzanine         High

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The correct answer is B

Mezzanine investors are behind senior but ahead of equity investors.

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3、John Diego is reviewing two RMBS investments for his firm, First Light Capital, LLC. He has identified a senior tranche from a subprime securitized pool with a AA rating and a senior tranche from a conforming mortgage pool also with a AA rating. How should Mr. Diego rank the investments?

A) Conforming senior tranche is undervalued relative to the subprime senior tranche.

B) Conforming senior tranche is overvalued relative to the subprime senior tranche.

C) Neither is overvalued relative to the other.

D) Subprime senior tranche is overvalued relative to the conforming senior tranche.

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The correct answer is C

Ratings assigned by credit rating agencies are supposed to summarize the total risk in the security so that any bond issue of the same rating offers the same risk-return rewards.

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4、Which of the following is NOT true about the excess spread?

A) Excess spread is the net difference between weighted average mortgage rates and investor coupons.

B) Excess spread maybe negative.

C) Excess spread, when positive, is paid to senior tranche investors.

D) Excess spread protects all investors.

likaiba

 

The correct answer is C

The excess spread is paid to equity tranche investors.