Exam 25: Market for Asset-Backed Securities

External credit enhancements come in more complicated forms than internal credit enhancements and may alter the cash flow characteristics of the loans even in the absence of default.

Rate reduction bonds, also called stranded cost bonds or stranded asset bonds, are backed by a state-legislative approved special charge, referred to as the competitive transition charge, charged by pharmaceutical companies.

Securitization has resulted in financial disintermediation.

There are provisions in credit card receivable-backed securities that require ________ of the principal if certain events occur. When ________ occurs, the bond classes are retired sequentially by distributing the principal payments to the specified bond class instead of using those payments to acquire more receivables.

All loans must be serviced. What does servicing involve? What is the servicer responsible for?

Which of the below statements is FALSE?

There are three general categories of credit cards. Which of the below is NOT one of these categories?

What is the key benefit of securitization to financial markets?

Credit card payable-backed securities are backed by the cash flow of a pool of credit card receivables and the cash flow consists of finance charges collected, fees, and principal.

Securitization allows for the creation of tradable securities with better liquidity making it feasible for investors to invest in residential mortgage loans, automobile loans, or credit card receivables. By making these financial assets tradable, what does securitization achieve? What concerns are created with the financial disintermediating impact of securitization?

In assessing the risk on ABS, rating agencies ignore asset risks, structural risks, third parties to the structure, and the legal structure.

If there are a few borrowers in the pool that are significant in size relative to the entire pool balance, this diversification benefit can be lost, resulting in a higher level of credit risk referred to as ________.

Student loan-backed securities are backed by federally guaranteed and private student loans and involve three periods with respect to the borrower's payments: deferment period, grace period, and loan repayment period.

Securitization is a vehicle for raising funds directly in the public market without the need for a financial ________. That is, securitization is said to result in ________.

In the creation of an ABS, which of the below statements is FALSE?

The rating agencies analyze the structure to test whether the collateral's cash flows match the payments that must be made to satisfy the issuer's obligations and in doing so they must make assumptions about losses and delinquencies and consider various interest rate scenarios after taking into consideration credit enhancements.

Which of the below statements is TRUE?

In a securitization, a variety of third parties are involved including ________.

The key benefit of securitization to financial markets is that it ________.

Structuring a securitization will depend on the characteristics of the underlying assets. Specifically, the structure depends on whether ________.