| Walters learns that the difference between the net coupons given and the stated 50 bp servicing fee is held as an excess servicing spread. Which of the following is least likely a purpose of the excess servicing spread in Table 1?
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A) |
Paying for administrative and managerial expenses. | |
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B) |
Establishing an account to pay for possible future losses. | |
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C) |
Augmenting external credit enhancements. | |
The excess servicing spread is placed in a reserve account called the excess servicing spread account. It will gradually grow over the length of the loan, so that it provides increasing protection against possible future losses. These funds complement the cash reserves and enhance any external arrangements. (Study Session 15, LOS 58.d)
Which of the following best describes the relationship between the MBS passthrough and CMO and an ABS paythrough? An ABS paythrough structure is:
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A) |
created from an ABS passthrough structure in the same way a CMO is created from an MBS passthrough. | |
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B) |
created directly from the underlying loans unlike the way a CMO is created from an MBS passthrough. | |
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C) |
similar to an MBS passthrough security except when using non-agency-based mortgages as collateral. | |
A CMO is a paythrough structure. A pool of passthrough securities serves as collateral for CMO paythrough securities. In the ABS market, once the loans are pooled, either passthrough or paythrough securities may be issued – it is not necessary to first create passthroughs when creating a paythrough structure for an ABS. (Study Session 15, LOS 56.g)
An older investor with a short time horizon and a strong desire for extra income wishes to purchase a MBS or ABS. Which of the following is the most accurate choice?
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A) |
The senior tranche from the loan detailed above. | |
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B) |
Investment-grade bonds with short maturities, rather than ABS or MBSs. | |
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C) |
Subordinated tranche 3 from the loan detailed above. | |
Investors with short time horizons and a need for income wish to avoid extension risk. The senior tranche from the above loan pool offers a chance to collect high prepayments during the first few years. The subordinated tranches protect against contraction risk, and do not meet the investor’s needs. Short-maturity corporate bonds will return the principal quickly, but because of fixed coupon payments, will not provide extra income. (Study Session 15, LOS 56.g)
Suppose all of the securities in Table 1 were backed by auto loans. Which of the following statements most accurately describes the difference, if any, in prepayment characteristics of auto loans versus mortgages? Prepayments on auto loans:
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A) |
occur frequently, but are rarely affected by refinancing. | |
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B) |
rarely occur, since auto loans traditionally have short maturities and low interest rates. | |
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C) |
are affected by the same factors as mortgage prepayments. | |
Car loans tend to balances that are small enough so that the benefits from refinancing are small. Auto-loan prepayments occur whenever a car is sold, traded in, or wrecked—all of which are relatively frequent occurrences. Consequently, they are not affected by all the same underlying factors as mortgage loans. (Study Session 15, LOS 58.e)
Based on the information in the tables above, which investment offers the most protection against default?
Loan group 4 has the highest excess servicing spread (9.20 ? 8.20 ? 0.50 = 0.50 or 50 bp excess servicing spread), which allows for the largest reserves against losses. The tranches offer protection against expansion or contraction risk, but probably have similar characteristics in terms of default risk. (Study Session 15, LOS 58.d) | 
发表于 2010-4-21 11:08
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