Explanation

Let's analyze both statements:

I. Overcollateralization

• Total liabilities = Senior tranche + Subordinated tranche A + Subordinated tranche B
• Total liabilities = $400,000,000 + $120,000,000 + $50,000,000 = $570,000,000
• Value of collateral = $600,000,000
• Overcollateralization = Collateral value - Total liabilities = $600,000,000 - $570,000,000 = $30,000,000
• Statement I is TRUE - There is $30 million in overcollateralization

II. Excess Spread

• Return on assets = 8.75%
• Interest paid on liabilities = 7.50%
• Fees and expenses = 0.60%
• Excess spread = Return on assets - Interest paid - Fees and expenses
• Excess spread = 8.75% - 7.50% - 0.60% = 0.65%
• Statement II is TRUE - There is 0.65% excess spread that provides credit enhancement

Conclusion

Both statements I and II are accurate, so the correct answer is C. Both I and II.

Credit Enhancement Mechanisms:

• Overcollateralization: The collateral value exceeds the total liabilities, providing a buffer against losses
• Excess Spread: The difference between asset returns and liability costs that can absorb losses before affecting investors