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LOS d: Distinguish among the various types of external and internal credit enhancements.
Q1. There are several types of external credit enhancements. All of the following are examples of external credit enhancements EXCEPT:
A) letters of credit.
B) setting aside reserve funds.
C) corporate guarantees.
Q2. 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) $57 million.
B) $140 million.
C) $0.
Q3. 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.
Q4. 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.
Q5. 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:
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Statement 1: |
Corporate guarantees, bond insurance and cash reserve funds are all examples of external credit enhancements. |
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Statement 2: |
The effectiveness of default protection offered by excess servicing spread funds can diminish if defaults are below initial projections. |
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Statement 3: |
Third-party guarantees impose a limit on the guarantor’s liability for losses at a specified level. |
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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.
Q6. 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.
Q7. 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:
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Point 1: |
Under a bullet payment structure, investors receive the total principal amount in a single payment. |
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Point 2: |
Prepayment risk applies to individual non-amortizing loans. |
Which of the following regarding Drummond’s points is most accurate?
A) Point 1 is correct and Point 2 is incorrect.
B) Points 1 and 2 are correct.
C) Point 2 is correct and Point 1 is incorrect.
Q8. Which of the following are least likely examples of internal credit enhancements?
A) Setting aside reserve funds.
B) Third party guarantees.
C) Structures containing senior and subordinated debt.
Q9. Which of the following is NOT a form of internal credit enhancement?
A) A senior/subordinated structure.
B) Reserve funds.
C) Sequential-pay structure.
Q10. External credit enhancement least likely includes:
A) corporate guarantee.
B) revenue fund.
C) bond insurance.
Q11. Which of the following is least likely an example of internal credit enhancement?
A) Excess servicing spread accounts.
B) Over-collateralization.
C) Bond insurance.
Q12. 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 subject to the credit risk of the third-party guarantor.
C) are only available on a short-term basis. | 
发表于 2009-3-26 10:01
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