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标题: Fixed Income【Reading 52】Sample [打印本页]
作者: JustasS    时间: 2012-4-2 18:29     标题: [2012 L2] Fixed Income【Session 15- 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.
作者: JustasS    时间: 2012-4-2 18:30

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.
作者: JustasS    时间: 2012-4-2 18:30

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.
作者: JustasS    时间: 2012-4-2 18:31

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.
作者: JustasS    时间: 2012-4-2 18:31

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.
作者: JustasS    时间: 2012-4-2 18:31

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.
作者: JustasS    时间: 2012-4-2 18:32

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.
作者: JustasS    时间: 2012-4-2 18:32

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.
作者: JustasS    时间: 2012-4-2 18:32

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.
作者: JustasS    时间: 2012-4-2 18:33

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.
作者: JustasS    时间: 2012-4-2 18:33

There are several types of external credit enhancements. All of the following are examples of external credit enhancements EXCEPT:
A)
setting aside reserve funds.
B)
letters of credit.
C)
corporate guarantees.


Setting aside reserve funds is an example of internal, not external credit enhancement.
作者: JustasS    时间: 2012-4-2 18:34

The investment policy committee of Worthy, Drummond, Bakerslee & Corrier has decided to devote this month’s overview meeting to a review of the firm’s asset-backed securities (ABS) investments. Worthy Drummond runs several billion dollars of fixed income securities in a variety of portfolios, and the members of the investment policy committee are becoming concerned about the impact of economic weakness on credit quality.
Jamison Bakerslee has recently led a project to review the guarantees on some of the firm’s ABS. He reports to the policy committee that one of the main guarantors of Worthy Drummond’s ABS portfolio, First Credit Systems, Inc., is the subject of rumors about a credit downgrade. Bakerslee points out, “If First Credit is downgraded, that means many of the issues we hold may be downgraded as well, since they have ratings that are already as high as First Credit’s current rating.” Lucinda Corrier agrees that a First Credit downgrade would be a potential problem, since “First Credit’s guarantee protects us against losses before the internal credit enhancements are used.”
Internal credit enhancements are of primary interest to Worthy Drummond because many of the securities the firm holds are in subordinated tranches. The policy committee is particularly concerned about its investments in a pool of boat loans that are not subject to any third-party guarantees. The pool consists of three tranches:

Senior tranche $460 million
Subordinated tranche A 90 million
Subordinated tranche B 50 million

The collateral for the pool of boat loans is $657 million.
Corrier, however, is more concerned about prepayment risk across the portfolio if economic weakness causes interest rates to decline. She reminds the investment policy committee, “Our auto loan-backed securities face the same prepayment risk that our collateralized mortgage obligations (CMOs) do.” Bakerslee points out that the firm’s investments in credit card receivable backed securities will still be in the lockout period for another two years, “so we don’t have to worry about prepayment of principal on those right now.”What is the amount of overcollateralization on the pool of boat loans?
A)
$140 million.
B)
$0.
C)
$57 million.


The pool of boat loans totals ($460 + 90 + 50 = ) $600 million dollars, and has collateral of $657 million.
Overcollateralization = $657 million - $600 million = $57 million.
(Study Session 15, LOS 52.d)

If the pool of boat loans suffers $154 million in losses, how much will holders of subordinated tranche A lose?
A)
$47 million.
B)
$23 million.
C)
$90 million.


If the pool of boat loans suffers $154 million in losses, the losses will be first absorbed by the $57 million in overcollateralization. That leaves ($154 – 57 = ) $97 million in losses to be distributed among the tranches.
Subordinated tranche B will lose $50 million, leaving ($97 – 50 = ) $47 million in losses for holders of subordinated tranche A.
(Study Session 15, LOS 52.d)

Regarding the statements made by Bakerslee and Corrier about the risk of a downgrade of First Credit:
A)
Bakerslee’s statement is correct; Corrier’s statement is incorrect.
B)
Bakerslee’s statement is correct; Corrier’s statement is correct.
C)
Bakerslee’s statement is incorrect; Corrier’s statement is correct.


The guarantee of a third party cannot provide a credit rating higher than the credit rating of the third party itself. Thus, if Worthy Drummond’s securities already have credit ratings as high as First Credit’s own rating and First Credit’s rating is downgraded; the credit ratings on the guaranteed securities will likely be downgraded. Bakerslee’s comment is correct.
Third party guarantees (an external credit enhancement) protect against losses before internal credit enhancements are used. Corrier’s statement is also correct. (Study Session 15, LOS 52.d)

Jodie Taylor, an intern with Worthy Drummond, was asked to sit in the meeting and take notes. After the meeting, Taylor comes into Corrier’s office and tells Corrier that she wants to make sure she understands credit enhancements. She makes four statements:

Statement 1:
Corporate guarantees, bond insurance and cash reserve funds are all examples of external credit enhancements.

Statement 2:
The effectiveness of default protection offered by excess servicing spread funds can diminish if defaults are below initial projections.

Statement 3:
Third-party guarantees impose a limit on the guarantor’s liability for losses at a specified level.

Statement 4:
Cash reserve funds come from issuance proceeds.

Which of the following regarding Taylor’s statements is most accurate?
A)
Statement 3 is correct and Statement 2 is incorrect.
B)
Statement 1 is correct and Statement 2 is incorrect.
C)
Statement 4 is correct and Statement 3 is incorrect.


Cash reserve funds are internal, not external, credit enhancements, therefore Statement 1 is incorrect. The effectiveness of default protection offered by excess servicing spread funds can diminish if defaults exceed certain projections. Defaults that are below projections would be a positive occurrence and would not cause protection provided by the servicing spread to decline – Statement 2 is incorrect. Statements 3 and 4 are both correct statements. (Study Session 15, LOS 52.d)
Regarding the statements made by Bakerslee and Corrier about prepayment risk:
A)
Bakerslee’s statement is incorrect; Corrier’s statement is incorrect.
B)
Bakerslee’s statement is incorrect; Corrier’s statement is correct.
C)
Bakerslee’s statement is correct; Corrier’s statement is incorrect.


No principal is paid to the ABS holders during the lockout period, so there can be no prepayment risk at that time. Bakerslee’s statement is correct.
The prepayments from a pool of auto loans are much more predictable and much less dependent on interest rate changes than prepayments on mortgage loans. Corrier’s statement is incorrect. (Study Session 15, LOS 52.b)

Following the investment policy meeting, Peter Drummond sends an e-mail to the other partners regarding key points discussed in the meeting. In the section of his e-mail about payment structures, Drummond makes two points:

Point 1:
Under a bullet payment structure, investors receive the total principal amount in a single payment.

Point 2:
Prepayment risk applies to individual non-amortizing loans.

Which of the following regarding Drummond’s points is most accurate?
A)
Points 1 and 2 are correct.
B)
Point 2 is correct and Point 1 is incorrect.
C)
Point 1 is correct and Point 2 is incorrect.


Point 1 is correct – under a bullet payment structure, investors receive the total principal amount in a single sum. Point 2 is incorrect - prepayment risk does not apply to individual non-amortizing loans because they have no scheduled principal payments. (Study Session 15, LOS 52.e)
作者: JustasS    时间: 2012-4-2 18:34

Which of the following are least likely examples of internal credit enhancements?
A)
Third party guarantees.
B)
Setting aside reserve funds.
C)
Structures containing senior and subordinated debt.


Third party guarantees are external credit enhancements, not internal enhancements.
作者: JustasS    时间: 2012-4-2 18:35

Which of the following is NOT a form of internal credit enhancement?
A)
Sequential-pay structure.
B)
A senior/subordinated structure.
C)
Reserve funds.


A sequential-pay structure is not a credit enhancement. External credit enhancements are financial guarantees from third parties that generally support the performance of the bond. Internal credit enhancements do not rely on a third-party guarantee. They commonly include setting aside reserve funds and structures that contain senior and subordinated debt.
作者: JustasS    时间: 2012-4-2 18:35

External credit enhancement least likely includes:
A)
revenue fund.
B)
corporate guarantee.
C)
bond insurance.


External enhancements include corporate guarantees and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.
作者: JustasS    时间: 2012-4-2 18:35

Which of the following is least likely an example of internal credit enhancement?
A)

Bond insurance.
B)

Excess servicing spread accounts.
C)

Over-collateralization.


Bond insurance is an example of external, not internal, credit enhancement.
作者: JustasS    时间: 2012-4-2 18:36

Which of the following is a general problem associated with external credit enhancements? External credit enhancements:
A)
are very long-term agreements and are therefore relatively expensive.
B)
are only available on a short-term basis.
C)
are subject to the credit risk of the third-party guarantor.


According to the “weak link” philosophy adopted by rating agencies, the credit quality of an issue can not be higher than the credit rating of the third-party guarantor. Along these lines, if the guarantor is downgraded, the issue itself could be subject to downgrade even if the structure is performing as expected.
作者: JustasS    时间: 2012-4-2 18:36

Suppose that the collateral for an asset-backed securities (ABS) structure has a gross weighted average coupon of 10.5%. The servicing fee is 50 basis points. The tranches issued have a weighted average coupon rate of 8.5%. What is the excess servicing spread?
A)
1.50%.
B)
2.50%.
C)
1.00%.


The excess servicing spread is determined as follows:

Gross weighted average coupon

=

10.50%

−

Servicing fee

=

0.50%

Spread available to pay tranches

=

10.00%

−

Net weighted average coupon

=

8.50%

Excess servicing spread.

=

1.50% = 150 bps.

作者: JustasS    时间: 2012-4-2 18:36

Which of the following is a disadvantage of bond insurance as an external credit enhancement?
A)
It only provides protection against systematic risk, not against idiosyncratic risk.
B)
Its cost.
C)
It covers only bond interest.


Bond insurance provides for protection against losses when bonds default and includes both principal and interest payments. Issuers must weigh the costs of insurance against the decrease in required yield.
作者: JustasS    时间: 2012-4-2 18:37

Which of the following is the best description of excess servicing spread accounts as an internal credit enhancement? Excess servicing spread accounts involve the allocation of:
A)
all expenses into a separate reserve account.
B)
the servicing fee into a separate reserve account.
C)
excess cash into a separate reserve account after paying out coupon, servicing fee and other expenses.


All excess cash is paid into the excess servicing spread account in order to be used to pay for possible future losses.
作者: JustasS    时间: 2012-4-2 18:37

Which of the following is least likely a common form of external credit enhancement?
A)
A corporate guarantee.
B)
Portfolio insurance.
C)
Bond insurance.


External credit enhancements are financial guarantees from third parties that generally support the performance of the bond. Portfolio insurance is not a third party guarantee.
作者: JustasS    时间: 2012-4-2 18:38

Which of the following is the best description of cash reserve funds as an internal credit enhancement? Cash reserve funds are investments in:
A)
money market instruments created from securitizing mortgages.
B)
money market instruments created from issuance proceeds.
C)
U.S. Treasury bonds created from issuance proceeds.


Cash reserve funds are cash deposits that come from issuance proceeds. This excess cash provides for the establishment of a reserve account to pay for future losses. Cash reserve funds are usually used along with external credit enhancements.
作者: JustasS    时间: 2012-4-2 18:38

Which of the following statements regarding securities backed by closed-end home equity loans is CORRECT?
A)
The prepayment benchmark is issuer specific.
B)
Prepayments are not allowed.
C)
The securities in those deals are typically floating-rate tranches.


Unlike the PSA benchmark, the prepayment benchmark speed in the prospectus is issuer specific.
作者: JustasS    时间: 2012-4-2 18:38

In a passthrough structure, the principal cash flow from the credit card accounts are:
A)
paid to security holders on a pro rata basis.
B)
amoritized without penalty.
C)
never paid due to interest rate charges.


In a passthrough structure, the principal cash flow from the credit card accounts are paid to security holders on a pro rata basis.
作者: JustasS    时间: 2012-4-2 18:39

Financial consultant George Price advises high-net-worth individuals on income investments. His firm, Price Enterprises, specializes in asset-backed securities (ABS). Price’s son-in-law, Roger Camby, also works for the firm. Price and Camby do not get along well, and they often engage in heated arguments in the office.
On a certain morning, Price and Camby are arguing about which asset-backed securities (ABS) to purchase. Over the last two weeks, Price Enterprises signed up a half-dozen new clients and received several million in new funds from existing clients, and the company needs some new ideas for the portfolios.
Camby is excited about a new ABS issued by a large retailer, Glendo’s. The ABS reflects a bundle of nonamortizing consumer credit accounts. As usual, Price prefers a different option, in this case a new collateralized mortgage obligation (CMO) issued by Trident Mortgage. Both securities offer similar total return potential and seem reasonably valued. Both Camby and Price believe the other analyst’s preferred securities are too risky.Unable to come to an agreement about which ABS to purchase, Camby and Price return to an old topic of discussion, the merits of collateralized debt obligations, (CDOs). Both analysts agree on the benefits of CDOs, which allow investors to profit off the spread between return on collateral and the cost of funding. But they disagree on the best strategy for constructing a CDO. Price prefers a simple cash CDO and criticizes Camby for his preference for more complicated synthetic securities. Camby argues that synthetic CDOs offer several advantages over cash CDOs:

Bindle Bonds, a consultancy that sets up payment structures for entities that wish to issue asset-backed securities, has a referral relationship with Price Enterprises. Just before lunch, Bindle sales director Marty Malkin calls Price to offer him a piece of a new ABS comprised of thousands of home-improvement loans. Price likes the interest rates and the senior/subordinated structure that contains several junior tranches and senior tranches. But during his analysis of the default and prepayment projections, Price becomes concerned that Bindle is underestimating the risks. In response to Price’s concerns, Malkin explains that the ABS has a shifting-interest mechanism designed to limit risk for the senior tranches.
After Price agrees to invest in the new Bindle ABS, he and Camby go to lunch. As they wait for their food, they discuss an investment a colleague pitched to Camby that morning. The ABS issuer used a conditional prepayment rate to estimate prepayment risks. According to the issuer’s model, prepayment risks are modest, in part because refinancing is not a major concern with the underlying securities. The underlying securities are fixed-rate loans, and their default risk is fairly high. One benefit of the securities is the fact that principal payments are immediately passed on to investors.
Immediately after Price and Camby return from lunch, Kay Peterson, a longtime client of Price Enterprises, comes into the office with questions about investing in the mortgage securities market. Price and Camby agree that this is an excellent time for Peterson to enter the MBS market, but disagree which mortgage securities would be best. Price believes Peterson’s best alternative would be a commercial MBS. Price makes the following arguments for CMBS:
Camby, however, disagrees with his father-in-law. He suggests that Peterson should invest in residential MBS, citing the following reasons:What affect will the shifting-interest mechanism connected to the ABS backed by home-improvement loans have on the senior tranches?
Credit Risk?Prepayment Risk?
A)
IncreaseReduce
B)
ReduceIncrease
C)
ReduceReduce


Shifting-interest mechanisms reduce the proportional share of the outstanding loan balance in junior tranches as prepayments occur. This has the effect of reducing credit risk for the senior tranches but increasing their prepayment risk. (Study Session 15, LOS 52.d)
The ABS Price and Camby discussed at lunch is most likely backed by:
A)
auto loans.
B)
Small Business Administration (SBA) loans.
C)
home-equity loans.


The low prepayment risk eliminates home-equity loans, which have a high prepayment risk. The fact that the loans have a fixed interest rate suggests they are not SBA loans, most of which have a variable rate. That leaves auto loans, and the characteristics of the ABS presented in the vignette can all apply to auto-loan-backed securities. (Study Session 15, LOS 52.e)
Which of Camby’s statements about the advantage of synthetic CDOs is least accurate?
A)
A bank can use a synthetic CDO to take debt off the balance sheet without the consent of borrowers.
B)
It is cheaper to purchase exposure to an asset through a swap than to purchase the asset directly.
C)
Only the senior section must be funded.


For a synthetic CDO, only the junior section must be funded. The other statements are accurate. (Study Session 15, LOS 52.f)
Camby’s preference for Glendo’s bonds suggests he is most likely concerned about:
A)
credit risk.
B)
prepayment risk.
C)
interest-rate risk.


We have little information about the Glendo’s and Trident bonds. All we know is that the Glendo’s ABS is backed by consumer credit accounts, while the Trident securities are backed by mortgage loans. Most consumer-credit accounts are nonrevolving, meaning that during the lockout period, any prepayments will be invested in new loans. As such, the Glendo’s ABS probably has less prepayment risk than the Trident ABS. We don’t know enough about the loans to conclude anything about their credit or interest-rate risk. But the difference in prepayment risk is apparent. Camby’s preference for Glendo’s suggest he wants to avoid prepayment risk. (Study Session 15, LOS 52.b)
With regard to statements made by Price concerning the reasons why Peterson should invest in commercial MBS:
A)
both statements are correct.
B)
only one statement is correct.
C)
both statements are incorrect.


Only one of Price’s statements is correct regarding commercial MBS. He is correct that contraction risk on a CMBS can be lowered by adding prepayment lock out periods and yield maintenance charges, as well as other loan-level call protections such as defeasance and prepayment penalty points. Price is incorrect to state that a low debt-to-service coverage ratio makes a CMBS attractive. A high debt-to-service coverage ratio and low loan-to-value ratio are better for lenders. (Study Session 15, LOS 51.l)
With regard to statements made by Camby concerning the reasons why Peterson should invest in residential MBS:
A)
both statements are correct.
B)
both statements are incorrect.
C)
only one statement is correct.


Camby is incorrect in stating residential MBS have more certain cash flows than a CMBS because you can rely on their government-backed guarantee. Although it is true that government agency issued MBS do come with a pseudo-governmental guarantee, many residential MBS are non-agency issued, meaning they are issued by private entities and do not come with a government guarantee.
Camby’s statement regarding a CMBS defeasance clause is incorrect. If the borrower makes early payments on the mortgage loan, the mortgage loan can be defeased, which means the loan proceeds are received by the loan servicer and invested in U.S. Treasury securities, essentially creating cash collateral against the loan. Treasuries provide higher-quality collateral than the underlying real estate, so loans structured with defeasance increase the credit quality of a CMBS loan pool. (Study Session 15, LOS 51.l)
作者: JustasS    时间: 2012-4-2 18:40

The measure of prepayments associated with securities backed by auto loans is called:
A)
auto-backed prepayments.
B)
absolute prepayment speed.
C)
collateralized prepayment speed.


The measure of prepayments associated with securities backed by auto loans is called absolute prepayment speed.
作者: JustasS    时间: 2012-4-2 18:40

Relative to mortgage-backed securities and home equity loan-backed assets, prepayments for manufactured housing-backed securities are:
A)
less significant because the underlying loans are not as sensitive to refinancing.
B)
more significant because the underlying loans are more sensitive to refinancing.
C)
equally as significant.


Relative to mortgage-backed securities and home equity loan-backed assets, prepayments for manufactured housing-backed securities are less significant because the underlying loans are not as sensitive to refinancing.
作者: JustasS    时间: 2012-4-2 18:40

How is the principal retired when an early amortization provision is triggered? It is retired by:
A)
maturing credit card receivable-backed securities immediately.
B)
paying credit card borrowers' principal payments directly to investors without using them to purchase more receivables.
C)
reinvesting credit card borrowers' principal payments in receivables.


When early amortization occurs, the credit card tranches are retired sequentially. This is accomplished by paying prepayments to investors instead of using them to purchase more receivables.
作者: JustasS    时间: 2012-4-2 18:41

A closed-end home equity loan (HEL) is a secondary mortgage that is structured like:
A)
a variable rate, amortizing loan.
B)
a standard balloon payment loan.
C)
a standard, fixed-rate, fully amortizing loan.


Closed-end HELs are structured like standard, fixed rate, fully amortizing loans.
作者: JustasS    时间: 2012-4-2 18:41

Prepayments are more stable for manufactured housing-backed securities (HBS) because:
A)
manufactured housing securities have very high interest rates.
B)
manufactured housing loans are too large to be marketed separately.
C)
borrowers are not sensitive to refinancing since they have few alternative financing sources.


Manufactured home borrowers are not sensitive to refinancing as they have few alternative financing sources.
作者: JustasS    时间: 2012-4-2 18:42

Prepayments for manufactured housing-backed securities are less significant because the underlying loans are not as sensitive to refinancing. This is correct for all of the following reasons EXCEPT:
A)
Often borrowers are using Federal Housing Administration (FHA) and Veterans Administration (VA) loans, which prohibit refinancing.
B)
Loan balances are usually small, reducing the savings resulting from refinancing.
C)
Depreciation of mobile homes in the early years can cause the loan outstanding to be greater than the value of the asset.


Borrowers are not necessarily borrowing through the FHA or VA, and even if they were, they would not be prohibited from refinancing.
作者: cross-ied    时间: 2012-4-2 18:43

A home equity loan (HEL) is a loan backed by residential property. Which of the following generally does NOT describe a HEL?
A)
It is frequently a first lien on property owned by a borrower with an excellent credit history.
B)
The loan often does not meet agency requirements for a qualified loan.
C)
It is frequently a first lien on property owned by a borrower with a marginal credit history.


HELs are frequently a first lien on property owned by a borrower with a marginal credit history, not an excellent credit history.
作者: cross-ied    时间: 2012-4-2 18:43

Which of the following is referred to as a lockout period for a credit card receivable-backed security? A lockout period is a specific period of time during which:
A)
credit card borrowers are not allowed to make repayments.
B)
principal payments made by credit card borrowers are retained by the trustee.
C)
interest payments made by credit card borrowers are retained by the trustee.


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 the lockout period, which may vary from 18 months to 10 years, no principal is paid to the ABS holders. Once the lockout period ends, principal payments are passed on to the security holders.
作者: cross-ied    时间: 2012-4-2 18:43

Which of the following statements concerning the early amortization trigger for a credit card receivable-backed security is CORRECT? An early amortization trigger leads to:
A)
partial default.
B)
the principal payments made by credit card holders being reinvested in receivables.
C)
credit card tranches being retired sequentially.


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.
作者: cross-ied    时间: 2012-4-2 18:44

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


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.”
作者: cross-ied    时间: 2012-4-2 18:44

Which of the following statements regarding credit card receivable-backed securities is least accurate?
A)
Credit card receivable-backed securities use a master trust structure.
B)
Credit card receivable-backed securities pay principal and interest each payment just like a mortgage-backed security.
C)
The cash flow to the pool of credit card receivables consists of finance charges, fees, and principal repayment.


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.
作者: cross-ied    时间: 2012-4-2 18:44

Which of the following statements regarding Small Business Administration (SBA) loan-backed securities is least accurate?
A)
Loan payments are based on the reference rate at the beginning of each period.
B)
Pooled SBA loans are fairly heterogeneous.
C)
The interest rate on SBA loans is reset monthly or quarterly.


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.
作者: cross-ied    时间: 2012-4-2 18:45

Which of the following statements regarding Small Business Administration (SBA) loan-backed securities is least accurate?
A)
SBA loans are backed by the credit of the U.S. government.
B)
Prepayments on SBA loans are not passed through.
C)
Most SBA loans are based on the prime rate.


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.
作者: cross-ied    时间: 2012-4-2 18:45

Which of the following statements regarding student loan asset-backed securities (SLABs) is least accurate?
A)
Loan repayments are based on a reference rate plus a margin.
B)
Interest accrues on the loan during the deferment period.
C)
Prepayments occur when government guarantees are paid in the case of defaults.


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.
作者: cross-ied    时间: 2012-4-2 18:45

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)
Alternative loans are securitized and guaranteed by the U.S. government.
C)
The borrower makes no payment during the deferment period and no interest accrues.


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.
作者: cross-ied    时间: 2012-4-2 18:45

Which of the following statements regarding collateralized debt obligations (CDOs) is least accurate?
A)
The senior tranche is usually paid a floating rate.
B)
Mezzanine tranches receive a fixed rate.
C)
Interest rate swaps are rarely used due to scrutiny from rating agencies.


The collateral usually has a mix of floating and fixed rate debt so interest rate swaps are used to manage the risk from cash flow mismatches. Interest rate swaps are often used by asset managers to control the interest rate risk imposed by this mismatch, Rating agencies usually mandate the use of swaps. In CDOs there is usually a senior tranche that receives a floating rate, mezzanine tranches that receive a fixed rate, and a subordinate or equity tranche that provides prepayment and credit protection to the other tranches.
作者: cross-ied    时间: 2012-4-2 18:46

Which of the following statements regarding cash collateralized debt obligations (CDOs) is least accurate?
A)
An arbitrage CDO is issued to profit on the spread between the return on the underlying assets and the return paid to investors.
B)
Balance sheet-driven are the majority of cash CDOs.
C)
Cash CDOs have three phases in their lifetime.


Arbitrage CDOs are the majority of cash CDOs and are issued to profit on the spread between the return on the underlying assets and the return paid to investors. A bank or insurance company wishing to reduce their loan exposure on the balance sheet creates a balance sheet CDO. Cash CDOs have three phases in their lifetime. During the ramp up phase, the portfolio is created using financing from different tranches. During the reinvestment phase, cash flows from prepayments and default recoveries are reinvested, assuming coverage tests are satisfied. In the pay down phase, principal payments are made to junior and senior tranche holders and the CDO is wound down.
作者: cross-ied    时间: 2012-4-2 18:46

Which of the following statements regarding synthetic collateralized debt obligations (CDOs) is least accurate?
A)
The senior portion doesn’t require funding.
B)
The ramp up period is longer than that for cash CDOs.
C)
A credit default swap is sold.


In a synthetic CDO, the ramp up period is shorter than the ramp up period for cash CDOs because no actual (cash) debt obligations are purchased. Instead, the synthetic CDO gains exposure and earns a return by selling a credit default swap. By selling a credit default swap, they pay the buyer a specific amount if a credit event occurs (e.g. bankruptcy) and in return receive a swap premium. In essence, the CDO has credit exposure and earns a return just as if they had bought the underlying bond. The senior portion doesn’t require funding.
作者: cross-ied    时间: 2012-4-2 18:46

A collateralized debt obligation (CDO) is an asset that is least likely to be backed by which of the following types of debt obligations:
A)
non-investment grade corporate bonds.
B)
investment grade corporate bonds.
C)
bank loans to corporations.


A CDO is an asset-backed security (ABS) that is collateralized by a pool of debt obligations comprising below investment grade corporate bonds, corporate loans advanced by commercial banks, and bond issues in emerging markets. Investment grade bonds are not typically an underlying asset in CDOs.
作者: cross-ied    时间: 2012-4-2 18:47

Which of the following statements is least likely to be considered an advantage generally associated with collateralized debt obligations?
A)
Through the issuance of a CDO, an issuer can maintain legal ownership of the underlying assets but can transfer the economic risks to an investor.
B)
The spread between an asset’s return and the associated cost to finance the asset can be “locked-in” through the issuance of a CDO.
C)
The senior tranche of a CDO provides an attractive fixed-rate vehicle for fixed-rate investors.


The senior tranche of a CDO will most likely be structured with a floating-rate coupon, and the mezzanine tranches will have a fixed-rate payment.
作者: cross-ied    时间: 2012-4-2 18:47

Which of the following statements regarding collateralized debt obligations (CDOs) is least accurate?
A)
In the market today, the majority of cash CDO issued are balance sheet-driven.
B)
A CDO’s collateral pool will typically contain some combination of fixed-rate and floating-rate debt instruments.
C)
The main purpose behind an arbitrage-driven cash CDO is to capture the spread between the return on the collateral and their funding costs.


The majority of cash CDOs issued are arbitrage-driven, in which the issuer is trying to capture the spread between the underlying assets and the costs to finance them.
作者: cross-ied    时间: 2012-4-2 18:47

A $350 million collateralized debt obligation (CDO) was recently issued by a large Wall Street firm. The portfolio manager will actively manage the underlying assets, and will sell assets periodically in order to generate the cash flow necessary to pay the CDO’s tranches as outlined in the prospectus. This type of CDO is most appropriately described as a:
A)
arbitrage-driven cash CDO.
B)
cash flow CDO.
C)
market value CDO.


The manager of a market value CDO will actively manage the portfolio to generate sufficient cash flows. This is in contrast to a cash flow CDO, where the portfolio is structured at inception in such a way that its principal and interest payments can pay the tranches and trading profits will not be needed to support the cash flows of the CDO.



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