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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?

5.34% (D) Signup and view all the answers

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

10.5% (C) Signup and view all the answers

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

Reduced default risk for investors (D) Signup and view all the answers

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

To match their long-term liabilities (D) Signup and view all the answers

What is a major risk associated with RMBS transactions?

All of the above (D) Signup and view all the answers

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

Default risk (C) Signup and view all the answers

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

It goes up (C) Signup and view all the answers

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

To act as market makers and encourage home ownership (C) Signup and view all the answers

How liquid are RMBS markets in the US?

Extremely liquid (A) Signup and view all the answers

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

The originator will be called upon to provide or set aside cash as collateral. (C) Signup and view all the answers

What is the purpose of a guarantee in credit enhancement?

To provide protection to investors in the event of defaults. (D) Signup and view all the answers

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

They increase from junior to senior classes. (D) Signup and view all the answers

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

To absorb the first risk of default. (D) Signup and view all the answers

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

A loan is not repaid even after the due date. (D) Signup and view all the answers

What is the purpose of credit enhancement methods?

To reduce the risk of default in a securitization portfolio. (B) Signup and view all the answers

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