ABS Flashcards
An investor in mortgage-backed securities who is concerned about extension risk but willing to accept contraction risk should most appropriately invest in:
In a sequential-pay CMO, the early tranches are more exposed to contraction risk, and the later tranches are more exposed to extension risk. PAC securities limit both contraction and extension risk for a range of prepayment rates. Mortgage pass-through securities, such as agency residential MBS, do not reallocate contraction and extension risk among bondholders.
(Module 45.2, LOS 45.f)
Total cash flows to investors in an ABS issue are:
Cash flows from the underlying asset pool are used to pay fees to the servicer as well as payments to the ABS investors
An annualized measure of the prepayments experienced by a pool of mortgages is its:
The conditional prepayment rate (CPR) is an annualized measure of a mortgage pool’s prepayments. The single monthly mortality rate is the percentage by which prepayments have reduced the month-end principal balance. The PSA prepayment benchmark is a monthly series of CPRs to which a mortgage pool’s CPR may be compared.
A covered bond that may postpone the originally scheduled maturity date by as much as a year to delay default is:
A soft-bullet covered bond may postpone the originally scheduled maturity date by as much as a year to delay default. A hard-bullet covered bond is in default if the issuer fails to make a scheduled payment. A conditional pass-through covered bond converts to a pass-through bond on the maturity date if any payments remain due.
In a commercial mortgage-backed security (CMBS), which of the following is an example of CMBS-level call protection?
Call protection in the context of a CMBS refers to protection against prepayment risk. Structuring a CMBS with a residual (equity or first-loss) tranche provides investors in the senior tranches with CMBS-level call protection. Prepayment lockout periods and yield maintenance charges are examples of loan-level call protection because they apply to the individual loans.
The type mortgage-backed security that is most likely to offer significant call protection is:
Commercial MBS typically have some type of call protection (restriction on prepayments), either in the structure of the MBS or at the loan level. Both agency RMBS and non-agency RMBS typically have no restrictions on prepayments and are subject to prepayment risk.
(Module 45.2, LOS 45.g)
An asset-backed security with a senior/subordinated structure is said to have:
A senior/subordinated structure in an ABS establishes credit tranching, in which risk of losses due to defaults on the underlying loans is redistributed among different classes of ABS holders. Time tranching redistributes prepayment risk among different classes of ABS holders.
An agency RMBS pool with a prepayment speed of 50 PSA will have a weighted average life that is:
Weighted average life of a mortgage pool is less than its WAM if there are any prepayments. “50 PSA” means the prepayment speed is assumed to be 50% of the Public Securities Association prepayment benchmark.
(Module 45.1, LOS 45.e)
An agency RMBS pool with a prepayment speed of 50 PSA will have a weighted average life that is:
Weighted average life of a mortgage pool is less than its WAM if there are any prepayments. “50 PSA” means the prepayment speed is assumed to be 50% of the Public Securities Association prepayment benchmark.
(Module 45.1, LOS 45.e)
