likaiba

 

5、Which of the following factors is least likely to impact the analysis of excess spread?

A) Modeling potential interest rate paths.

B) Servicer quality.

C) Involuntary prepayments.

D) Voluntary prepayments.

likaiba

 

The correct answer is B

Modeling potential interest rates paths and involuntary and voluntary prepayments have a direct impact on cash flow analysis and hence excess spread. The effect of servicer quality has a much less important effect.

likaiba

 

AIM 6: Discuss the credit ratings process in the subprime mortgage backed securities.

1、Which of the following is NOT true about credit ratings of subprime securitized assets?

A) Rating agencies are compensated by the arrangers.

B) Rating agencies face an inherent moral hazard problem with servicers.

C) Ratings should rate “through the cycle”.

D) Ratings are based upon the originator.

likaiba

 

The correct answer is D

Ratings are based upon the collateral in the pool, not the originator.

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2、The Newest City Financial Corp has securitized a pool of subprime mortgages. The credit rating agency was not able to provide as a credit rating on the senior tranche as Newest City Financial Corp was expected. How could Newest City restructure the tranches to receive the higher credit rating?

A) Increase the size of the senior tranche and decrease the size of the equity tranche.

B) Increase the size of the senior tranche and increase the size of the equity tranche. 

C) Decrease the size of the senior tranche and increase the size of the equity tranche. 

D) Decrease the size of the senior tranche and decrease the size of the equity tranche.

likaiba

 

The correct answer is C

To receive a higher credit rating, the senior tranche needs more protection. By increasing the equity tranche and decreasing the senior tranche size, more potential losses are diverted away from the senior tranche.

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3、Suppose the credit rating agencies have recently issued many rating downgrades for securitized subprime mortgages. The mortgages were previously issued during stronger economic times and received high initial ratings. Which of the following statements is most accurate?

A) The agencies rated “through the cycle” since the pools are now more likely to default as the economy weakens.

B) The agencies rated “through the cycle” because the initial pools were highly rated.

C) The agencies did not rate “through the cycle” because the initial pools were highly rated.

D) The agencies did not rate “through the cycle” since the pools are now more likely to default as the economy weakens.

likaiba

 

The correct answer is D

Rating agencies goal is to rate “through the cycle” where there are not excessive upgrades or downgrades as market conditions change. It is unreasonable to expect no ratings change but the emphasis is on “excessive” amount.

likaiba

 

AIM 7: Discuss the implications credit ratings had on the emergence of subprime related mortgage backed securities and why the credit ratings fell short in this process.

1、Which of the following statements is TRUE about securitized mortgage pools and corporate credit ratings?

A) MBS ratings are based upon dynamic asset pools.

B) Both corporate and MBS bonds can infuse additional capital.

C) MBS pools exhibit greater variation in losses.

D) Degree of correlation between assets is more important for corporate bond ratings.

likaiba

 

The correct answer is C

MBS ratings are based upon static pools. Only corporate bonds can infuse more capital into the firm. Degree of correlation is more important for MBS investors because the security is backed by a pool of assets.