Reading 58: Asset-Backed Sector of the Bond Market-LOS d 习题 2011, following, examples, several

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Session 15: Fixed Income: Structured Securities
Reading 58: Asset-Backed Sector of the Bond Market

LOS d: Distinguish among the various types of external and internal credit enhancements.

 

 

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.

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Setting aside reserve funds is an example of internal, not external credit enhancement.

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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.

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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.

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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.

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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.

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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.

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All excess cash is paid into the excess servicing spread account in order to be used to pay for possible future losses.

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

A) A corporate guarantee.

B) Portfolio insurance.

C) Bond insurance.

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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.

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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.

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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.

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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.

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Third party guarantees are external credit enhancements, not internal enhancements.

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Which of the following is NOT a form of internal credit enhancement?

A) A senior/subordinated structure.

B) Reserve funds.

C) Sequential-pay structure.

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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.

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External credit enhancement least likely includes:

A) corporate guarantee.

B) bond insurance.

C) revenue fund.

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External enhancements include corporate guarantees and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.

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

A) Excess servicing spread accounts.

B) Over-collateralization.

C) Bond insurance.

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Bond insurance is an example of external, not internal, credit enhancement.