18 Questions
What is the primary composition of Arbitrage CDOs?
High-yield instruments
Why are Arbitrage CDOs less common in European markets?
Due to limited market for high-yield paper
What is the purpose of credit enhancements in a CDO?
To reduce the default risk of the underlying assets
What is the Weighted Average Cost of Funds (WACF) for the given Arbitrage CDO?
5.34%
What is the return on investment realized by the CDO manager in the given example?
10.5%
What is the primary benefit of a CDO's risk-reward structure?
Reduced default risk for investors
What is one of the main reasons why insurance companies and pension funds invest in RMBS transactions?
To match their long-term liabilities
What is a major risk associated with RMBS transactions?
All of the above
What is the term for the original borrower's failure to meet their repayment obligations?
Default risk
What happens to the price of RMBS paper when interest rates in the economy go down?
It goes up
What is the purpose of government agencies like Fanny Mae in the US?
To act as market makers and encourage home ownership
How liquid are RMBS markets in the US?
Extremely liquid
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.
What is the purpose of a guarantee in credit enhancement?
To provide protection to investors in the event of defaults.
In a structural credit enhancement, what happens to the returns on investment?
They increase from junior to senior classes.
What is the role of the junior-most class in a structural credit enhancement?
To absorb the first risk of default.
What is an example of a default in a securitization portfolio?
A loan is not repaid even after the due date.
What is the purpose of credit enhancement methods?
To reduce the risk of default in a securitization portfolio.
Learn how government agencies like Fanny Mae facilitate home ownership and economic growth through securitization tranches. Understand the role of insurance companies and pension funds in RMBS transactions.
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