Q13. 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)   2.50%.

B)   1.00%.

C)   1.50%.

Q14. The master prospectus establishes the senior percentages in accordance with Table 1.

Table 1
Senior Prepayment Percentage
Years after Issuance	Senior Prepayment Percent
1-5	100
6	70
7	60
8	40
9	20
after year 9	0

The structure for an asset-backed security (ABS) is:

Senior tranche	$190 million
Subordinated tranche 1	$20 million
Subordinated tranche 2	$10 million

The value of the collateral for the structure is $220 million and subordinated tranche 2 is the first loss tranche.

In accordance with the senior repayment percentage presented in Table 1, if prepayments in month 110 (after year 9) are $5 million the senior tranche is paid:

A)   $1 million.

B)   $5 million.

C)   $0 million.

Q15. In accordance with the senior prepayment percentage presented in Table 1, if prepayments on a $50 million offering in month 30 are $2 million, the amount paid to the senior tranche is:

A)   $50 million.

B)   $1 million.

C)   $2 million.

Q16. Using the information above what is the amount of the loss for each tranche if losses due to default over the life of the structure total $7.5 million.

         Total loss Senior    Subordinated 1              Subordinated 2

A)     $0                                       $0                                                 $7.5

B)     $7.5                                    $0                                                 $0

C)     $0                                       $2.5                                             $5.0

Q17. Using the information above what is the amount of the loss for each tranche if losses due to default over the life of the structure total $25.0 million.

         Total loss Senior                Subordinated 1          Subordinated 2

A)      $0                                     $15.0                                           $10.0

B)      $5.0                                  $5.0                                             $10.0

C)      $2.5                                  $2.5                                             $15.0

Q18. Which of the following is a disadvantage of bond insurance as an external credit enhancement?

A)   Its cost.

B)   It only provides protection against systematic risk, not against idiosyncratic risk.

C)   It covers only bond interest.

Q19. 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)   excess cash into a separate reserve account after paying out coupon, servicing fee and other expenses.

B)   all expenses into a separate reserve account.

C)   the servicing fee into a separate reserve account.

Q20. Which of the following is least likely a common form of external credit enhancement?

A)   Portfolio insurance.

B)   A corporate guarantee.

C)   Bond insurance.

Q21. 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)   U.S. Treasury bonds created from issuance proceeds.

C)   money market instruments created from issuance proceeds.

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