ikoreaii

A corporation may issue asset backed securities because:

A) it wants to change the structure of its balance sheet.

B) both of the reasons are valid.

C) it wants to reduce the cost of borrowing.

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Both of the reasons are valid.

ikoreaii

Which of the following statements concerning asset-backed securities (ABSs) is least accurate?

A) ABSs typically have lower debt ratings than the firm's other borrowings.

B) The asset-backed pool may be overcollateralized to provide a credit enhancement.

C) Typical assets to securitize are auto loans and credit card receivables.

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The objective of the firm with an ABS issue typically is to get a higher debt rating (a lower cost of borrowing). Typically, the ABS has a higher debt rating, perhaps because of credit enhancements.

ikoreaii

External credit enhancement least likely includes:

A) corporate guarantee.

B) bond insurance.

C) revenue fund.

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External enhancements include corporate guarantees and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.

ikoreaii

Which of the following is a general problem associated with external credit enhancements? External credit enhancements:

A) are subject to the credit risk of the third-party guarantor.

B) are very long-term agreements and are therefore relatively expensive.

C) are only available on a short-term basis.

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According to the “weak link” philosophy adopted by rating agencies, the credit quality of an issue can not be higher than the credit rating of the third-party guarantor. Along these lines, if the guarantor is downgraded, the issue itself could be subject to downgrade even if the structure is performing as expected.

ikoreaii

Which of the following terms describe external credit enhancements for asset backed securities?

A) Corporate guarantee.

B) Both of these choices are external credit enhancements.

C) Bond insurance.

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Both of the choices are commonly used external credit enhancements.

ikoreaii

There are several types of external credit enhancements. All of the following are examples of external credit enhancements EXCEPT:

A) setting aside reserve funds.

B) letters of credit.

C) corporate guarantees.

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Setting aside reserve funds is an example of internal, not external credit enhancement.

ikoreaii

Which of the following statements about special purpose vehicles (SPVs) is least accurate?

A) They are only used in asset backed security transactions.

B) SPVs are also known as bankruptcy remote entities.

C) SPVs shield the assets of an asset backed security from creditors of the corporation that is securitizing the assets.

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There are other advantages of SPVs dealing with the financial accounting of the assets sold.

ikoreaii

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.

ikoreaii

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.

ikoreaii

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) Rating agencies.

B) Investment banks.

C) Special purpose vehicles (SPVs).

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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.