Deck 4: Introduction to Asset-Backed Securities

Question 1

a special purpose entity issues asset-backed securities in the following structure. $\begin{array} { l c } \text { Bond Class } & \text { Par Value ( } € \text { millions) } \\\hline \text { A (senior) } & 200 \\\text { B (subordinated) } & 20 \\\text { C (subordinated) } & 5 \\\hline\end{array}$ at which of the following amounts of default in par value would Bond Class a experience a loss?

A) €20 million
B) €25 million
C) €26 million

Answer 1

€26 million

Question 2

Securitization is beneficial for banks because it:

A) repackages bank loans into simpler structures.
B) increases the funds available for banks to lend.
C) allows banks to maintain ownership of their securitized assets.

Answer 2

B

Question 3

Which of the following statements is correct concerning mortgage loan defaults?

A) a non-recourse jurisdiction poses higher default risks for lenders.
B) In a non-recourse jurisdiction, strategic default will not affect the defaulting borrow- er's future access to credit.
C) When a recourse loan defaults, the mortgaged property is the lender's sole source for recovery of the outstanding mortgage balance.

Answer 3

A

Question 4

Which of the following describes a typical feature of a non-agency residential mort- gage-backed security (rMBS)?

A) Senior/subordinated structure
B) a pool of conforming mortgages as collateral
C) a guarantee by a government-sponsored enterprise

Question 5

Securitization benefits investors by:

A) providing more direct access to a wider range of assets.
B) reducing the inherent credit risk of pools of loans and receivables.
C) eliminating cash flow timing risks of an aBS, such as contraction and extension risks.

Question 6

If interest rates increase, an investor who owns a mortgage pass-through security is most likely affected by:

A) credit risk.
B) extension risk.
C) contraction risk.

Question 7

Which of the following statements related to securitization is correct?

A) time tranching addresses the uncertainty of a decline in interest rates.
B) Securitizations are rarely structured to include both credit tranching and time tranching.
C) Junior and senior bond classes differ in that junior classes can only be paid off at the bond's set maturity.

Question 8

a ba1lloon payment equal to a mortgage's original loan amount is a characteristic of a:

A) bullet mortgage.
B) fully amortizing mortgage.
C) partially amortizing mortgage.

Question 9

a goal of securitization is to:

A) separate the seller's collateral from its credit ratings.
B) uphold the absolute priority rule in bankruptcy reorganizations.
C) account for collateral's primary influence on corporate bond credit spreads.

Question 10

The creation of bond classes with a waterfall structure for sharing losses is referred to as:

A) time tranching.
B) credit tranching.
C) overcollateralization.

Question 11

Which of the following characteristics of a residential mortgage loan would best protect the lender from a strategic default by the borrower?

A) recourse
B) a prepayment option
C) Interest-only payments

Question 12

Fran Martin obtains a non-recourse mortgage loan for $500,000. one year later, when the outstanding balance of the mortgage is $490,000, Martin cannot make his mortgage
Payments and defaults on the loan. The lender forecloses on the loan and sells the house
For $315,000. What amount is the lender entitled to claim from Martin?

A) $0.
B) $175,000.
C) $185,000.

Question 13

The last payment in a partially amortizing residential mortgage loan is best referred to as a:

A) waterfall.
B) principal repayment.
C) balloon payment.

Question 14

In a securitization, the collateral is initially sold by the:

A) issuer.
B) depositor.
C) underwriter.

Question 15

In a securitization, time tranching provides investors with the ability to choose between:

A) extension and contraction risks.
B) senior and subordinated bond classes.
C) fully amortizing and partially amortizing loans.

Question 16

In a securitization, the special purpose entity (SPe) is responsible for the:

A) issuance of the asset-backed securities.
B) collection of payments from the borrowers.
C) recovery of underlying assets from delinquent borrowers.

Question 17

If a mortgage borrower makes prepayments without penalty to take advantage of falling interest rates, the lender will most likely experience:

A) extension risk.
B) contraction risk.
C) yield maintenance.

Question 18

Securitization benefits financial markets by:

A) increasing the role of intermediaries.
B) establishing a barrier between investors and originating borrowers.
C) allowing investors to tailor credit risk and interest rate risk exposures to meet their individual needs.

Question 19

William Marolf obtains a 5 million eur mortgage loan from Bank nederlandse. a year later the principal on the loan is 4 million eur and Marolf defaults on the loan. Bank
Nederlandse forecloses, sells the property for 2.5 million eur, and is entitled to collect
The 1.5 million eur shortfall from Marolf. Marolf most likely had a:

A) bullet loan.
B) recourse loan.
C) non-recourse loan.

Question 20

a benefit of securitization is the:

A) reduction in disintermediation.
B) simplification of debt obligations.
C) creation of tradable securities with greater liquidity than the original loans.

Question 21

The tranches in a collateralized mortgage obligation (CMo) that are most likely to provide protection for investors against both extension and contraction risk are:

A) planned amortization class (PaC) tranches.
B) support tranches.
C) sequential-pay tranches.

Question 22

Which of the following best describes the cash flow that owners of credit card receivable asset-backed securities receive during the lockout period?

A) no cash flow
B) only principal payments collected
C) only finance charges collected and fees

Question 23

The Cdo tranche with a credit rating status between senior and subordinated bond class- es is called the:

A) equity tranche.
B) residual tranche.
C) mezzanine tranche.

Question 24

Support tranches are most appropriate for investors who are:

A) concerned about their exposure to extension risk.
B) concerned about their exposure to concentration risk.
C) willing to accept prepayment risk in exchange for higher returns.

Question 25

Which of the following is most likely an advantage of collateralized mortgage obligations (CMos)? CMos can

A) eliminate prepayment risk.
B) be created directly from a pool of mortgage loans.
C) meet the asset/liability requirements of institutional investors.

Question 26

a commercial mortgage-backed security (CMBS) does not meet the debt-to-service cov- erage at the loan level necessary to achieve a desired credit rating. Which of the following
Features would most likely improve the credit rating of the CMBS?

A) Subordination
B) Call protection
C) Balloon payments

Question 27

an excess spread account incorporated into a securitization is designed to limit:

A) credit risk.
B) extension risk.
C) contraction risk.

Question 28

Which of the following investments is least subject to prepayment risk?

A) auto loan receivable-backed securities
B) Commercial mortgage-backed securities (CMBS)
C) non-agency residential mortgage-backed securities (rMBS)

Question 29

The key to a Cdo's viability is the creation of a structure with a competitive return for the:

A) senior tranche.
B) mezzanine tranche.
C) subordinated tranche.

Question 30

Which type of asset-backed security is not affected by prepayment risk?

A) auto loan aBS
B) residential MBS
C) Credit card receivable aBS

Question 31

Credit risk is an important consideration for commercial mortgage-backed securities (CMBS) if the CMBS are backed by mortgage loans that:

A) are non-recourse.
B) have call protection.
C) have prepayment penalty points.

Question 32

The single monthly mortality rate (SMM) most likely:

A) increases as extension risk rises.
B) decreases as contraction risk falls.
C) stays fixed over time when the standard prepayment model remains at 100 PSa.

Question 33

If a default occurs in a non-recourse commercial mortgage-backed security (CMBS), the lender will most likely:

A) recover prepayment penalty points paid by the borrower to offset losses.
B) use only the proceeds received from the sale of the property to recover losses.
C) initiate a claim against the borrower for any shortfall resulting from the sale of the property.

Question 34

In the context of mortgage-backed securities, a conditional prepayment rate (CPr) of 8% means that approximately 8% of the outstanding mortgage pool balance at the beginning
Of the year is expected to be prepaid:

A) in the current month.
B) by the end of the year.
C) over the life of the mortgages.

Question 35

In credit card receivable aBS, principal cash flows can be altered only when the:

A) lockout period expires.
B) excess spread account is depleted.
C) early amortization provision is triggered.

Question 36

The longest-term tranche of a sequential-pay CMo is most likely to have the lowest:

A) average life.
B) extension risk.
C) contraction risk.

Question 37

Which commercial mortgage-backed security (CMBS) characteristic causes a CMBS to trade more like a corporate bond than a residential mortgage-backed security (rMBS)?

A) Call protection
B) Internal credit enhancement
C) debt-service coverage ratio level

Question 38

Compared with the weighted average coupon rate of its underlying pool of mortgages, the pass-through rate on a mortgage pass-through security is:

A) lower.
B) the same.
C) higher.

Question 39

For a mortgage pass-through security, which of the following risks most likely increases as interest rates decline?

A) Balloon
B) extension
C) Contraction

Question 40

In auto loan aBS, the form of credit enhancement that most likely serves as the first line of loss protection is the:

A) excess spread account.
B) sequential pay structure.
C) proceeds from repossession sales.

Question 41

When the collateral manager fails pre-specified risk tests, a Cdo is:

A) deleveraged by reducing the senior bond class.
B) restructured to reduce its most expensive funding source.
C) liquidated by paying off the bond classes in order of seniority.

Question 42

Collateralized mortgage obligations (CMos) are designed to:

A) eliminate contraction risk in support tranches.
B) distribute prepayment risk to various tranches.
C) eliminate extension risk in planned amortization tranches.