honeycfa

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.

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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.

honeycfa

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.

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Credit enhancements increase the costs associated with borrowing using ABS.

honeycfa

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) Special purpose vehicles (SPVs).

B) Rating agencies.

C) Investment banks.

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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.