Government Agencies in Securitization and Economic Growth
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Questions and Answers

What is the primary composition of Arbitrage CDOs?

  • Mixed-yield instruments
  • High-yield instruments (correct)
  • Low-yield instruments
  • Government-backed securities

    • Why are Arbitrage CDOs less common in European markets?

  • Due to limited market for low-yield paper
  • Due to lack of investor demand
  • Due to regulatory restrictions
  • Due to limited market for high-yield paper (correct)

    • What is the purpose of credit enhancements in a CDO?

  • To increase the returns for the investors
  • To provide a guarantee for the equity holders
  • To increase the liability portfolio
  • To reduce the default risk of the underlying assets (correct)

    • What is the Weighted Average Cost of Funds (WACF) for the given Arbitrage CDO?

    <p>5.34%</p> Signup and view all the answers

    What is the return on investment realized by the CDO manager in the given example?

    <p>10.5%</p> Signup and view all the answers

    What is the primary benefit of a CDO's risk-reward structure?

    <p>Reduced default risk for investors</p> Signup and view all the answers

    What is one of the main reasons why insurance companies and pension funds invest in RMBS transactions?

    <p>To match their long-term liabilities</p> Signup and view all the answers

    What is a major risk associated with RMBS transactions?

    <p>All of the above</p> Signup and view all the answers

    What is the term for the original borrower's failure to meet their repayment obligations?

    <p>Default risk</p> Signup and view all the answers

    What happens to the price of RMBS paper when interest rates in the economy go down?

    <p>It goes up</p> Signup and view all the answers

    What is the purpose of government agencies like Fanny Mae in the US?

    <p>To act as market makers and encourage home ownership</p> Signup and view all the answers

    How liquid are RMBS markets in the US?

    <p>Extremely liquid</p> Signup and view all the answers

    What happens if the terms of securitization mandate it, in the context of cash collateral?

    <p>The originator will be called upon to provide or set aside cash as collateral.</p> Signup and view all the answers

    What is the purpose of a guarantee in credit enhancement?

    <p>To provide protection to investors in the event of defaults.</p> Signup and view all the answers

    In a structural credit enhancement, what happens to the returns on investment?

    <p>They increase from junior to senior classes.</p> Signup and view all the answers

    What is the role of the junior-most class in a structural credit enhancement?

    <p>To absorb the first risk of default.</p> Signup and view all the answers

    What is an example of a default in a securitization portfolio?

    <p>A loan is not repaid even after the due date.</p> Signup and view all the answers

    What is the purpose of credit enhancement methods?

    <p>To reduce the risk of default in a securitization portfolio.</p> Signup and view all the answers

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