Book 4_Fixed_READING 65_FIXED-INCOME-SECURITIZATION

Question 1

Securitization process

Answer 1

• Step 1: A bank making loans or a corporation extending credit to customers (referred to as the originator) creates a pool of debt-based assets.
• Step 2: The pool of assets (referred to as the collateral) is sold to a separate legal entity, referred to as a special purpose entity (SPE).
• Step 3: The SPE issues fixed-income securities (referred to as asset-backed securities, or ABSs) supported by the cash flows from the collateral (i.e., the borrowers making repayments on their loans)

Question 2

Benefits of securitization to the originators of the collateral

Answer 2

• Increased business activity through re-lending the proceeds
• Improved profitability from fees for originating and arranging the sale of collateral
• Lower capital reserves after removing the collateral from their balance sheets
• Increased liquidity of the underlying collatera

Question 3

Benefits of securitization to ABS investors

Answer 3

• Risk and return tailored to the requirements of the investor
• Access to collateral that investors would have difficulty accessing directly
• Greater liquidity than the underlying collateral

Question 4

Benefits of securitization to economies and financial markets

Answer 4

• Decreased liquidity risk, because ABSs can be traded more easily than the underlying collateral
• Improved market efficiency, because increased trading helps markets trade at equilibrium prices
• Lower financing costs and leverage for originators

Question 5

Parties to a securitization are a seller of financial assets, an SPE, and a servicer

Answer 5

• The seller is the firm that is raising funds through the securitization.
• An SPE is an entity independent of the seller. The SPE buys financial assets from the seller and issues ABSs supported by these financial assets.
• The servicer carries out collections and other responsibilities related to the financial assets. The servicer may be the same entity as the seller, but does not have to be

Question 6

A trustee

Answer 6

is also appointed to oversee the safekeeping of collateral and cash flows due to the ABS investors and provide information to ABS holders