LOS i, (Part 1): Define an asset-backed security, and describe the role of a special purpose vehicle in an asset-backed security's transaction.fficeffice" />

Q1. Which of the following statements about special purpose vehicles (SPVs) is least accurate?

A)   SPVs are also known as bankruptcy remote entities.

B)   SPVs shield the assets of an asset backed security from creditors of the corporation that is securitizing the assets.

C)   They are only used in asset backed security transactions.

Correct answer is C)

There are other advantages of SPVs dealing with the financial accounting of the assets sold.

Q2. Which of the following statements about asset backed securities (ABSs) is most accurate?

A)   The credit rating of an ABS must be the same as that of the issuer.

B)   Residential mortgages represent the largest type of asset that has been securitized.

C)   Credit enhancements are uncommon for ABS.

Correct answer is B)

The credit rating of an ABS pool is a function of its credit enhancements, which are quite common. The more credit enhancements, the higher the ratings.

Q3. Which of the following reasons is the best reason NOT to enhance the credit quality of an asset backed security (ABS) pool?

A)   Liquidity.

B)   Cost.

C)   Increase the chance of bankruptcy.

Correct answer is B)

Credit enhancements increase the costs associated with borrowing using ABS.

Q4. Which of the following entities play a critical role in the ability to create an asset backed security with a higher credit rating than the corporation?

A)   Rating agencies.

B)   Investment banks.

C)   Special purpose vehicles (SPVs).

Correct answer is C)

SPVs, or special purpose corporations, buy the assets from the corporation. The SPV separates the assets used as collateral from the corporation that is seeking financing. This shields the assets from other creditors.

Q5. Which of the following statements about special purpose vehicles (SPVs) is most accurate?

A)   SPVs do not legally own the assets of the asset backed pool.

B)   SPVs are used exclusively for asset backed transactions.

C)   If bankruptcy occurs, a judge could rule that the SPVs assets can be considered general assets of the corporation.

Correct answer is C)

Legal experts believe this is unlikely, but the issue is still a bit ambiguous legally.