Financial Risk Manager Part 2
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In the scenario where a bank aims to securitize car loans by creating a Special Purpose Vehicle (SPV), transferring the loans to the SPV through a "true sale" transaction, and having the SPV issue securities through a "revolving securitization structure," which of the following statements accurately reflects the typical characteristics of securitization transactions and the specific features often incorporated in revolving securitization structures?
In the scenario where a bank aims to securitize car loans by creating a Special Purpose Vehicle (SPV), transferring the loans to the SPV through a "true sale" transaction, and having the SPV issue securities through a "revolving securitization structure," which of the following statements accurately reflects the typical characteristics of securitization transactions and the specific features often incorporated in revolving securitization structures?
Explanation:
The correct answer is B. One of the benefits of securitization for financial institutions is to obtain cheaper funding. The weighted average cost of the securitization may be lower than the cost of the bank's current debt. This is often the case if the credit quality of the securitized assets is higher than the credit quality of the bank's balance sheet as a whole.
Option A is incorrect because it misdescribes overcollateralization. The credit quality of the securitized car loan assets would be enhanced if the principal value of notes issued is lower than the principal value of the assets, not higher.
Option C is incorrect as it describes an amortizing (pass-through) SPV structure, not a revolving SPV structure. Prepayment assumptions can be incorporated in a revolving structure, contrary to what the statement suggests.
Option D is incorrect because it describes the master trust SPV structure, not the revolving structure. The reference to weighted-average life (WAL) describes the amortization structure, which is not applicable to a revolving structure.