Question 1

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.

Accepted Answer

Student loan-backed securities are indeed backed by both federally guaranteed and private student loans, and typically involve three different periods of time in relation to the borrower's payments: deferment, grace, and repayment.

Question 2

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

Accepted Answer

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Question 3

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

Accepted Answer

While securitization can have benefits such as increased liquidity, it also carries inherent risks such as increased complexity and opacity, which can contribute to financial instability. Additionally, securitization played a significant role in the 2008 financial crisis. Therefore, concerns about its impact are warranted.

Question 4

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.

Accepted Answer

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Question 5

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

Accepted Answer

This is correct as the cash flow for auto loan-backed securities typically includes the monthly loan payments and any prepayments made by borrowers.

Question 6

What is the key benefit of securitization to financial markets?

Accepted Answer

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Question 7

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

Accepted Answer

This statement is false. Rating agencies consider asset risks, structural risks, third parties to the structure, and the legal structure when assessing the risk on ABS. These factors can significantly impact the creditworthiness of the securities and are taken into account by rating agencies when assigning a rating.

Question 8

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.

Accepted Answer

Evaluating asset risks involves analyzing the credit quality of the collateral, considering the underlying borrower's ability to pay, and also taking into account the borrower's equity in the asset, as it affects the loan-to-value ratio and the risk of default.

Question 9

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.

Accepted Answer

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Question 10

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.

Accepted Answer

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Question 11

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

Accepted Answer

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Question 12

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.

Accepted Answer

Rate reduction bonds are not backed by a special charge from pharmaceutical companies, but rather by a regulated charge on ratepayers to recover costs from stranded assets or costs associated with a change in regulatory structure.

Question 13

Securitization has resulted in financial disintermediation.

Accepted Answer

Securitization allows for assets such as mortgages, loans, and other financial instruments to be converted into securities that can be sold on capital markets. This bypasses traditional intermediaries such as banks and other financial institutions, resulting in financial disintermediation.

Question 14

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.

Accepted Answer

The statement accurately describes the role of rating agencies in analyzing collateral and making assumptions about losses, delinquencies, and interest rates.

Question 15

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.

Accepted Answer

The statement accurately describes the rating agency's process of investigating all third parties involved in a securitization to determine their ability to perform.

Question 16

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.

Accepted Answer

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Question 17

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

Accepted Answer

In the securitization of nonamortizing assets, during the lockout or revolving period, all principal payments received are typically used to purchase new collateral, not to sell old collateral. This process allows the pool of assets to maintain its size and continue generating income.

Question 18

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.

Accepted Answer

SBA loan-backed securities are indeed backed by loans made by SBA lenders to qualified businesses, but they are also backed by the full faith and credit of the U.S. government, providing an additional layer of security for investors.

Question 19

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?

Accepted Answer

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Quiz 25: Market for Asset-Backed Securities