A UK-based SPV has issued asset-backed securities with the following structure.

Bond Class Par value (in million)

A (Senior) 250

B (Subordinated) 50

C (Subordinated) 50

D (Subordinated) 10

Total 310 (Total Liabilities = Total Assets)

Please consider the below queries and fully show your calculations and reasoning.

1. What is the minimum amount of losses that would hurt bond Class A holders?
2. Calculate the Credit Enhancement (CE) available to class A and discuss what type of CE this represents and its function.
3. How would your answer in b. change if there is also a Reserve Fund in place available for all tranches? The Reserve is fully funded, has not been depleted and represents 3.0% of the outstanding class A.
4. Is a Reserve Fund a source of internal or external CE? Motivate your answer.

Suppose that the total Assets amount to 300m, there is no Reserve Fund and bonds issuance remains 310m, as detailed below:

A (Senior) 250

B (Subordinated) 50

C (Subordinated) 50

D (Subordinated) 10

5. What is the minimum amount of losses that would hurt Class A bond-holders?

f. Calculate Class D CE. Can CE be negative? Discuss the implications.