Table of Contents
CFA Level 2 – Fixed Income, Session 15-Reading 58, Asset-Backed Sector of the Bond Market-LOS b
(Notes, Practice Questions, Sample Questions)
1. Prepayment tranching refers to:
A) subdividing a corporate bond so some components pay coupon and others pay principal.
B) subdividing a corporate bond so some components pay earlier coupon payments than others.
C) subdividing an asset or mortgage backed security so some components are exposed to more prepayment risk than others
<Explanation> C — Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others
2. Prepayment tranching is also referred to as:
A) serial tranching.
B) credit tranching.
C) time tranching
<Explanation> C — Prepayment tranching is also referred to as time tranching. Prepayment tranching refers to when an asset or mortgage backed security is subdivided so some components are exposed to more prepayment risk than others
3. The most common form of credit enhancement for asset backed securities is:
A) corporate guarantees.
B) cash reserve funding.
C) credit tranching
<Explanation> C — Credit tranching is the most common form of credit enhancement for asset-backed securities. In credit tranching, bonds are divided into senior and subordinated sections. In this senior-subordinated structure, subordinated bonds absorb losses up to their par value after which losses are absorbed by senior bonds
