LOS b: Explain and contrast prepayment tranching and credit tranching.

Q1. Prepayment tranching refers to:

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

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

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

Q2. Prepayment tranching is also referred to as:

A)   serial tranching.

B)   time tranching.

C)   credit tranching.

Q3. The most common form of credit enhancement for asset backed securities is:

A)   credit tranching.

B)   corporate guarantees.

C)   cash reserve funding.

LOS b: Explain and contrast prepayment tranching and credit tranching. fficeffice" />

Q1. Prepayment tranching refers to:

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

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

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

Correct answer is B)

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

Q2. Prepayment tranching is also referred to as:

A)   serial tranching.

B)   time tranching.

C)   credit tranching.

Correct answer is 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.

Q3. The most common form of credit enhancement for asset backed securities is:

A)   credit tranching.

B)   corporate guarantees.

C)   cash reserve funding.

Correct answer is 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.

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