1．Which of the following statements regarding factors considered by rating agencies in rating asset-backed securities is FALSE?

A)   The borrower's equity in an asset that has been offered as collateral is the primary determinant of whether the borrower will default or sell the asset to pay off the loan.

B)   The concentration of loans is important since a small number of large borrowers in a pool will increase credit risk.

C)   A firm's credit rating must be less than or equal to its overall corporate rating.

D)   The servicer of the loan must be evaluated since the servicer is responsible for distributing proceeds to the bondholders, determining the interest rate for the period, and advancing payments when there are delinquencies.

2．Which of the following is NOT a primary factor considered by rating agencies in rating asset-backed securities?

A)   Credit quality of the collateral.

B)   Quality of the servicer.

C)   Legal structure

D)   Event risk.

3．The most important issue for the credit analysis of an asset-backed security is:

A)   legal structure.

B)   quality of the seller/servicer.

C)   payment structure.

D)   quality of collateral.

1．Which of the following statements regarding factors considered by rating agencies in rating asset-backed securities is FALSE?

A)   The borrower's equity in an asset that has been offered as collateral is the primary determinant of whether the borrower will default or sell the asset to pay off the loan.

B)   The concentration of loans is important since a small number of large borrowers in a pool will increase credit risk.

C)   A firm's credit rating must be less than or equal to its overall corporate rating.

D)   The servicer of the loan must be evaluated since the servicer is responsible for distributing proceeds to the bondholders, determining the interest rate for the period, and advancing payments when there are delinquencies.

The correct answer was  C)

If a firm has structured securitized assets so that, in the event of bankruptcy, the courts will not apply the cash flow from the collateral toward the satisfaction of general corporate liabilities, then it is possible to obtain a credit rating higher than its overall corporate rating.

2．Which of the following is NOT a primary factor considered by rating agencies in rating asset-backed securities?

A)   Credit quality of the collateral.

B)   Quality of the servicer.

C)   Legal structure

D)   Event risk.

The correct answer was  D)

When rating asset-backed securities, the rating agency considers collateral credit quality, seller/service quality, cash flow stress, and payment structure and legal structure.

3．The most important issue for the credit analysis of an asset-backed security is:

A)   legal structure.

B)   quality of the seller/servicer.

C)   payment structure.

D)   quality of collateral.

The correct answer was  D)

The analyst must determine the quality of the collateral. The collateral must generate the needed cash flow to service the debt.