Deck 25: Market for Asset-Backed Securities

Question 1

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

A) There is a type of securitization transaction involving a conduit that buys the loans and securitizes them.
B) The originator of the loan is the seller of the loan.
C) The originator of the loan is always the issuer of the loan.
D) The SPV in a securitization is referred to as the "issuer" or "trust" in the prospectus.

Answer 1

C

Question 2

Two of the five of largest sectors within the ABS market that are NOT backed by real estate mortgage loans include: ________.

A) rate reduction stocks and student loan-backed securities.
B) large business administration loan-backed securities and credit card receivable-backed securities .
C) rate reduction bonds and senior citizen loan-backed securities.
D) credit card receivable-backed securities and auto loan-backed securities.

Answer 2

D

Question 3

There are four principal reasons why a corporation may elect to raise funds via a securitization rather than a corporate bond. One of these reasons includes ________.

A) the potential for increasing funding costs.
B) to decelerate earnings for financial reporting purposes.
C) to diversify funding sources.
D) potential relief from capital requirements for unregulated entities.

Answer 3

C

Question 4

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.

A) early amortization; late amortization
B) early amortization; early amortization
C) late amortization; late amortization
D) timely payoff; early payoff

Question 5

Due to the ________, quality of the collateral, and credit enhancement, a corporation can raise funds via a ________ where some of the bond classes have a credit rating better than the corporation seeking to raise funds and where in the aggregate the funding cost is less than issuing corporate bonds.

A) SPV; mobilization
B) OTC; mobilization
C) SPV; securitization
D) OTC; securitization

Question 6

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

A) An installment sale contract is a loan to the buyer of the assets wherein the buyer agrees to repay the originator of the loan over a specified period of time for the amount borrowed plus interest.
B) The criteria for granting a loan are referred to as underwriting standards.
C) The company is granting the loan is referred to as the originator of the loan.
D) The buyers of the assets will set up a legal entity referred to as a special purpose vehicle (SPV).

Question 7

A credit card receivable is a nonamortizing asset and therefore has a revolving structure. In regards to the lockout period, which of the below statements is FALSE?

A) During the lockout period the principal payments made by credit card borrowers comprising the pool are retained by the trustee and reinvested in additional receivables to maintain the size of the pool.
B) The lockout period can vary from 18 months to 10 years.
C) During the lockout period, the cash flow that is paid out to the bond classes is based on finance charges collected and fees.
D) The lockout period is followed by the principal amortization period, when the interest is no longer reinvested but paid to bondholders.

Question 8

Which of the below statements is FALSE?

A) Securitizations of assets/receivables to arise in the future are referred to as future flow securitizations.
B) The types of real estate-related assets that have been securitized include consumer and commercial loans/receivables.
C) Consumer loans/receivables that have been securitized include auto loans and leases, credit card receivables, student loans, and home improvement loans.
D) Commercial loans/receivables that have been securitized include trade receivables, equipment leases, operating assets, franchise loans, small business loans, and whole businesses.

Question 9

The two types of assets that can be used as collateral for an asset-backed securitization are ________.

A) existing assets/existing receivables or assets/receivables to arise in the future.
B) existing assets/existing receivables or assets/receivables from the past.
C) past assets/current receivables or assets/receivables to arise in the future.
D) existing assets/past receivables or assets/receivables to arise in the future.

Question 10

External credit enhancement involves a guarantee from a third party. The most common form of external credit enhancement is ________.

A) monoline wrap
B) bond envelope
C) bond insurance
D) surety stock

Question 11

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

A) general-purpose credit cards
B) independent networks
C) public-label credit cards
D) private-label credit cards

Question 12

Which of the below statements is TRUE?

A) Typically when amortizing assets are not securitized, the collateral is fixed over the life of the structure.
B) To deal with situations where there may be a match between the cash flow characteristics of the asset and the liabilities, interest rate derivative instruments are used in a securitization
C) The assets that are securitized can have a fixed rate or a floating rate.
D) If the reference rate for the floating-rate bond classes decreases sufficiently, there could be a shortfall between the interest received from the collateral and the aggregate interest payment that must be made to the bond classes.

Question 13

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

A) the assets are non-amortizing, and the interest rate on the collateral is fixed.
B) the liabilities are amortizing or non-amortizing, and the interest rate on the collateral is fixed.
C) the assets are non-amortizing, and the interest rate on the collateral is floating.
D) the assets are amortizing or non-amortizing, and the interest rate on the collateral is fixed or floating.

Question 14

________ do not have a schedule for the periodic payments that the individual borrower must make and requires that the borrower make a minimum periodic payment.

A) Nonamortizing assets
B) Amortizing liabilities
C) Amortizing assets
D) Securitized liabilities

Question 15

A security created by pooling loans (other than residential prime mortgage loans) is referred to as ________.

A) a residential-backed security (RBS).
B) a mortgaged-backed security (MBS).
C) an asset-backed security (ABS).
D) a prime mortgage-backed security (PMBS).

Question 16

________ are loans in which the borrower's periodic payment consists of scheduled principal and interest payments over the life of the loan.

A) Nonamortizing assets
B) Amortizing liabilities
C) Amortizing assets
D) Nonamortizing liabilities

Question 17

In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest. In regards to the transaction structure of an ABS, which of the below statements is FALSE?

A) The transaction structure of an ABS is designed to create bond classes with investment characteristics that are less attractive to institutional investors.
B) In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest.
C) Credit enhancement levels are determined relative to a specific rating desired by the seller/servicer for a security by each rating agency.
D) Typically in a securitization, there are at least two classes of bondholders: senior bond classes and subordinate bond classes.

Question 18

In regards to credit card receivable-backed securities, which of the below statements is FALSE?

A) Credit card receivable-backed securities are backed by the cash flow of a pool of credit card receivables.
B) The cash flow consists of finance charges collected, fees, and principal.
C) Finance charges collected represent the periodic interest the credit card borrower is charged based on the unpaid balance after the grace period but these fees do not include late payment fees and any annual membership fees.
D) Interest to the bond classes is paid periodically (e.g., monthly, quarterly, or semiannually) and may be fixed or floating.

Question 19

In regards to auto loan-backed securities, which of the below statements is TRUE?

A) Auto loan-backed securities are issued by the financial subsidiaries of auto manufacturers (domestic and foreign) but not by commercial banks and independent finance companies.
B) The cash flow for auto loan-backed securities consists of regularly scheduled monthly loan payments (interest and scheduled principal repayments) and any prepayments.
C) For securities backed by auto loans, prepayments cannot result from sales and trade-ins requiring full payoff of the loan.
D) Although refinancings may be a minor reason for prepayments of residential mortgage loans, they are of major importance for automobile loans.

Question 20

The responsibilities of the ________ are to represent the interests of the bond classes by monitoring compliance with covenants and in the event of default to enforce remedies as specified in the governing documents.

A) trustee
B) originator
C) SPV
D) conduit

Question 21

Few securitization transactions that employ internal credit enhancements follow a predetermined schedule that prioritizes the manner in which principal and interest generated by the underlying collateral must be used.

Question 22

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 ________.

A) liaison; accounting discrimination
B) advisor; accounting disintermediation
C) go-between; financial interpretation
D) intermediary; financial disintermediation

Question 23

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

A) credit guarantors (most commonly bond insurers) and the servicer.
B) a trustee and issuer's counsel.
C) a guaranteed investment contract provider (this entity insures the reinvestment rate on investable funds) and accountants.
D) All of these

Question 24

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 ________.

A) focus risk.
B) concentration risk.
C) concentric risk.
D) intensity risk.

Question 25

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.

Question 26

Which of the below statements is FALSE?

A) Securitization is a vehicle for raising funds directly in the public market without the need for a financial intermediary.
B) Securitization reduces risk via diversification.
C) The costs of contracting and information processing are provided in asset securitization.
D) The concerns with the financial disintermediating impact of securitization are that more assets will be held in the portfolio of banks.

Question 27

Uncommon forms of internal credit enhancement are senior/subordinate structures, overcollateralization, and reserve funds.

Question 28

By making financial assets tradable in this way, securitization ________.

A) increases agency costs, thereby making financial markets more efficient.
B) worsens liquidity for the underlying financial claims, thereby reducing liquidity risk in the financial system.
C) reduces agency costs, thereby making financial markets more efficient.
D) improves liquidity for the underlying financial claims, but increases the bankruptcy risk in the financial system.

Question 29

Securitizations require credit enhancement and the mechanism for credit enhancing a structure are classified as internal and external.

Question 30

Which of the below statements is TRUE?

A) The Small Business Association (SBA) is not an agency of the U.S. government empowered to guarantee loans made by approved SBA lenders to qualified borrowers.
B) Most SBA loans make monthly payments consisting only of interest payments.
C) Student loans are made to cover college costs (undergraduate, graduate, and professional programs such as medical and law school) and tuition for a wide range of vocational and trade schools.
D) The cash flow for senior citizen loans involve three periods with respect to the borrower's payments: deferment period, grace period, and loan repayment period.

Question 31

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

A) allows for the creation of tradable securities with better liquidity for financial claims that would otherwise have remained in the portfolio of financial intermediaries and therefore highly illiquid.
B) does not allow for the creation of tradable securities with better liquidity for financial claims that would otherwise have remained in the portfolio of financial intermediaries and therefore highly illiquid.
C) allows for the creation of tradable securities with better illiquidity for financial claims that would otherwise have remained in the portfolio of financial intermediaries and therefore highly liquid.
D) allows for the creation of tradable securities with better liquidity for market claims that would otherwise have remained out of the portfolio of financial intermediaries and therefore highly illiquid.

Question 32

The collateral in a securitization can be classified as either amortizing or nonamortizing assets.

Question 33

The SPV is the issuer of the ABS.

Question 34

In addition to the administration of the loan portfolio, the ________ is responsible for distributing the proceeds collected from the borrowers to the different bond classes in the structure according to the cash flow waterfall.

A) trustee
B) bond insurer
C) servicer
D) All of these

Question 35

The underlying principle of ________ is that a large number of borrowers in a pool will reduce the ________ via diversification.

A) asset socialization; market risk
B) asset securitization; credit risk
C) asset secularization; spread risk
D) asset simplification; diversified risk

Question 36

The competitive transition charge (CTC) is effectively a legislated asset and is the result of the movement to make the electric utility industry more competitive by deregulating the industry. In regards to CTC, which of the below statements is FALSE?

A) The CTC is collected by the utility over an unknown period of time.
B) Because the state legislature designates the CTC to be a statutory property right, it can be sold by a utility to an SPV and then securitized.
C) It is the legislative designation of the CTC as an asset that makes rate reduction bonds different from the typical asset securitized.
D) The CTC is initially calculated based on projections of utility usage and the ability to collect revenues.

Question 37

When unamortizing assets are securitized, the composition of the collateral is fixed over the life of the structure, all principal received by the trust is paid out to the bond classes and the securitization is said to be a self-liquidating structure.

Question 38

In considering the structure, the rating agencies will consider ________.

A) how losses will be allocated among the bond classes in the structure.
B) the prepayment allocation (i.e., the prepayment waterfall).
C) the interest rate spread between the interest earned on the collateral and the interest paid to the bond classes minus the servicing fee.
D) the potential for a trigger event to occur that will cause a late amortization of a deal.

Question 39

The SPV plays a critical role in a securitization because it legally separates the loans and receivables sold to the SPV from the originator and therefore reduces funding costs because investors look to the credit risk of the collateral rather than the credit risk of the originator.

Question 40

Investors in ABS are exposed to ________ and rely on ________ to evaluate that risk for the bond classes in a securitization.

A) credit risk; rating agencies
B) liquidity risk; government agencies
C) credit risk; government agencies
D) liquidity risk; rating agencies

Question 41

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.

Question 42

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

Question 43

There are benefits of securitization causing no concerns about its impact.

Question 44

Name three of the four principal reasons as to why a corporation may elect to raise funds via a securitization rather than a corporate bond.

Question 45

The cash flow for auto loan-backed securities consists of regularly scheduled monthly loan payments (interest and scheduled principal repayments) and any prepayments.

Question 46

What is the key benefit of securitization to financial markets?

Question 47

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

Question 48

Evaluating asset risks involves the analysis of the credit quality of the collateral and consider s the underlying borrower's ability to pay but not the borrower's equity in the asset.

Question 49

The assets that are securitized can have a fixed rate or a floating rate, which in turn impacts the structure in terms of the coupon rate for the bonds issued. Illustrate this.

Question 50

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.

Question 51

The collateral in a securitization can be classified as either amortizing or nonamortizing assets. Describe and contrast amortizing assets with nonamortizing assets.

Question 52

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.

Question 53

Securitization has resulted in financial disintermediation.

Question 54

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.

Question 55

Because there are several third parties involved in a securitization (e.g., bond insurer, servicer, a trustee, issuer's counsel) and they all play an important role, the rating agency will investigate all of them to determine their ability to perform.

Question 56

The Small Business Association (SBA) is an agency of the U.S. government empowered to guarantee loans made by approved SBA lenders to qualified borrowers. Describe the nature of these loans.

Question 57

When nonamortizing assets are securitized, there is a lockout period or revolving period where all principal received is used to sell old collateral.

Question 58

The Small Business Association loan-backed securities are backed by loans made by SBA lenders to qualified businesses but not backed by the full faith and credit of the government.

Question 59

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?