Reading 60: Asset-Backed Sector of the Bond Market - LOS common, credit, black, style

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1.The most common form of credit enhancement for asset backed securities is:

A)   credit tranching.

B)   letters of credit.

C)   cash reserve funding.

D)   corporate guarantees.

2.Prepayment tranching is also referred to as:

A)   credit tranching.

B)   time tranching.

C)   temporal tranching.

D)   serial tranching.

3.Prepayment tranching refers to:

A)   subdividing a corporate bond so some components pay coupon and others pay principal.

B)   subdividing a corporate bond so some components pay earlier coupon payments than others.

C)   when an investor request earlier payments from an issuer than expected on portions of a municipal bond.

D)   subdividing an asset or mortgage backed security so some components are exposed to more prepayment risk than others.

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答案和详解如下：

1.The most common form of credit enhancement for asset backed securities is:

A)   credit tranching.

B)   letters of credit.

C)   cash reserve funding.

D)   corporate guarantees.

The correct answer was A)

Credit tranching is the most common form of credit enhancement for asset-backed securities. In credit tranching, bonds are divided into senior and subordinated sections. In this senior-subordinated structure, subordinated bonds absorb losses up to their par value after which losses are absorbed by senior bonds.

2.Prepayment tranching is also referred to as:

A)   credit tranching.

B)   time tranching.

C)   temporal tranching.

D)   serial tranching.

The correct answer was B)

Prepayment tranching is also referred to as time tranching. Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others.

3.Prepayment tranching refers to:

A)   subdividing a corporate bond so some components pay coupon and others pay principal.

B)   subdividing a corporate bond so some components pay earlier coupon payments than others.

C)   when an investor request earlier payments from an issuer than expected on portions of a municipal bond.

D)   subdividing an asset or mortgage backed security so some components are exposed to more prepayment risk than others.

The correct answer was D)

Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others.