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The correct answer is B

The only time risk transfer can take place from loan originators to the investors is if there are no credit enhancements, such as over-collateralization or retention of first loss positions. Effective risk transfer can only occur in the situation of a true sale from the loan originator to the special purpose entity created to sell the assets as asset-backed securities.


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5、Credit enhancement for asset-backed securities (ABSs) is typically achieved through all of the following EXCEPT:

A) overcollateralization.

B) creation of a subordinated tranche.

C) a call provision. 

D) an excess spread.

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The correct answer is C

An investor’s claim when purchasing an ABS is solely with the ABS and no longer with the originator. The fact that KMAC has $10 million set aside means nothing for the ABS issue if it remains on KMAC’s balance sheet and is not part of the ABS issue. The other answer choices all describe forms of credit support that will support at least Tranches X and A, if not all 3 tranches. By having Tranche Z be subordinate to Tranche X, Tranche X has additional support. Also, loans of $125 million are used to back asset-backed securities worth ($50 + $35 + $35) = $120 million, which means the issue is overcollateralized. The weighted average interest rate paid on the securities is approximately 6.2%. If the weighted average interest rate on the loans that make up the pool is 6.4% that means there is an excess spread between the loans and securities that also provides support for the entire issue.


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2、Which of the following is NOT an example of providing credit support in a securitization?

A) Creating subordinated tranches.

B) Eliminating first loss positions.

C) Generating excess spread.

D) Over collateralizing.

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The correct answer is B

First loss positions provide credit support in a securitization. Eliminating first loss positions would remove credit support.


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3、Which of the following statements about credit enhancement is FALSE?

A) Excess spread is a form of external credit enhancement. 

B) Cash collateral account is a form of internal credit enhancement. 

C) A credit default swap is a form of external credit enhancement. 

D) Overcollateralization is a form of internal credit enhancement. 

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AIM 2: Analyze the differences in the mechanics of issuing securitized products using a trust or special purpose entity.

Why might the trust structure utilize a master trust and guarantor trust? 

    I. The assets can be considered a true sale.

    II. Generate additional trustee fees.

    III. The trust remains bankruptcy remote.

A) I and II. 

B) I and III. 

C) III only. 

D) I only. 

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The correct answer is D

The two trust structure allows the assets conveyed to be sufficiently distanced from the originator. Thus, the assets are considered a true sale and the originator, not the trust, remains bankruptcy remote. The two trust structure may generate more fees but that is not the motivation for its use.


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AIM 5: Discuss the various types of internal and external credit enhancements as well as liquidity support.

1、King Motors Acceptance Corporation (KMAC), the finance arm of King Motors, issues an auto-loan asset-backed security that consists of a senior tranche, denoted Tranche A in the amount of $50 million and an interest payment of 5 percent, and two subordinated tranches, denoted Tranches X and Z respectively, each with a face amount of $35 million. Tranche X pays investors annual interest at a rate of 6.5 percent while Tranche Z pays investors annual interest at a rate of 7.5 percent. Which of the following methods of credit support would NOT affect the credit quality of subordinated Tranche X?

A) The total amount of the auto loans that make up the asset-backed issue is $125 million.

B) The weighted average interest rate on the auto loans making up the pool is 6.4 percent.

C) KMAC has a reserve in the amount of $10 million that will remain on KMAC’s balance sheet. 

D) Any defaults on the part of King Motors customers will be first absorbed by Tranche Z. 

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7、Typical participants in a securitization include:

I.           underwriter, sponsor, regulatory agency.

II.         transferee, structuring agent, originator.

III.        sponsor, law firm, trustee.

A) I and II only.

B) I and III only.

C) II and III only.

D) I, II, and III only.

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