Deck 27: Market for Asset-Backed Securities

Question 1

Asset-backed securities are securities backed by:

A) Credit card receivables.
B) Auto loans.
C) Commercial mortgage loans.
D) Home equity loans.
E) a, b, and d only.

Answer 1

a, b, and d only.

Question 2

For a corporation, an asset-backed security:

A) Is an alternative means of raising funds.
B) Provides an opportunity to reduce funding costs by separating the credit rating of the issuer from the credit quality of the pool of loans or receivables.
C) Is a high return investment.
D) a and b only.
E) All of the above.

Answer 2

a and b only.

Question 3

Amortizing assets are loans, which:

A) Have a schedule of principal and interest payments over the life of the loan.
B) Do not have a schedule for the periodic payments that the individual borrower must make.
C) Require the borrower to make a minimum periodic payment.
D) b and c only.
E) All of the above.

Answer 3

Have a schedule of principal and interest payments over the life of the loan.

Question 4

Examples of nonamortizing assets include:

A) Credit card receivables.
B) Home equity loans.
C) Auto loans.
D) a and b only.
E) All of the above.

Question 5

For an amortization asset, the amortization is based on the:

A) Gross weighted average coupon.
B) Straight coupon rate.
C) Weighted average maturity.
D) a and c only.
E) None of the above.

Question 6

The most common forms of external credit enhancements are:

A) A corporate guarantee.
B) A bank letter of credit.
C) Bond insurance.
D) a and b only.
E) All of the above.

Question 7

Cash reserve funds are:

A) A form of reserve funds.
B) Typically used in conjunction with external credit enhancements.
C) A form of internal credit enhancement.
D) All of the above.
E) None of the above.

Question 8

The most common forms of internal credit enhancements are:

A) Overcollateralization.
B) Senior structures.
C) A letter of credit from a bank.
D) a and b only.
E) All of the above.

Question 9

Home equity loans are typically:

A) First lien on property.
B) Second lien on property.
C) Unsecured.
D) Secured by auto loans.
E) None of the above.

Question 10

Manufactured housing-backed securities, which are backed by loans for manufactured homes, are issued by:

A) Fannie Mae.
B) Ginnie Mae.
C) Private entities.
D) b and c only.
E) All of the above.

Question 11

Prepayments for auto loan-backed securities are measured in terms of:

A) Conditional prepayment rate (CPR).
B) Absolute prepayment speed (ABS).
C) Prospectus prepayment curve (PPC).
D) Shifting interest.
E) None of the above.

Question 12

The monthly cash flow that an investor in an SBA-backed security receives consists of:

A) The coupon interest based on the coupon rate set for the period.
B) The scheduled principal repayment.
C) Prepayments.
D) All of the above.
E) a and b only.

Question 13

In the typical pass-through structure of auto loan-backed deals, there is a:

A) Senior tranche.
B) Subordinated tranche.
C) Accrual tranche.
D) a and b only.
E) All of the above.

Question 14

To purchase student loans in the secondary market and to securitize pools of student loans, Congress created a government-sponsored enterprise commonly known as:

A) Fannie Mae.
B) Sallie Mae.
C) Freddie Mac.
D) Ginnie Mae.
E) None of the above.

Question 15

For a pool of credit card receivables, the cash flow consists of:

A) Collected finance charges.
B) Fees.
C) Principal.
D) a and b only.
E) All of the above.

Question 16

In an asset-backed security transaction:

A) There is no active management.
B) There is no business risk.
C) The servicer simply collects the cash flow.
D) All of the above.
E) None of the above.

Question 17

Student loans that are not part of a government guarantee program are called:

A) Term loans.
B) Bank loans.
C) Alternative loans.
D) Subsidized loans.
E) None of the above.

Question 18

Asset-backed securities and corporate bonds differ in terms of:

A) Credit risk.
B) Operational risk.
C) Investment risk.
D) a and b only.
E) None of the above.

Question 19

The performance of a portfolio of receivables is measured by:

A) Delinquencies.
B) Gross portfolio yield.
C) Monthly payment rate.
D) b and c only.
E) All of the above.

Question 20

Which of the following statements is false?

A) Default is a prepayment.
B) Nonamortizing assets have no prepayment.
C) Prepayments occur due to loan consolidations.
D) Prepayments are affected by the prevailing level of interest rates relative to the interest rate on the loan.
E) None of the above.

Question 21

All asset-backed securities are credit enhanced.

Question 22

Commercial banks issue securities backed by auto loans.

Question 23

In a true securitization, repayment is not dependent on a servicer's ability to generate cash flows.

Question 24

The schedule for the repayment of the principal is called payoff schedule.

Question 25

The creation of a senior-subordinated structure is a means of credit tranching.

Question 26

Describe the major differences between an asset-backed security and a corporate bond.

Question 27

Explain the different types of external and internal credit enhancements.

Question 28

Discuss the motivation for issuing asset-backed securities.