Asset Backed Securities a) A financial corporation with a BBB rating has a consumer loan portfolio An investment banker suggested that this corporation consider issuing an ABS where the collateral for the security is the consumer loan portfolio What would be the advantage of issuing an ABS rather than a straight offering of corporate bonds b) A corporation is considering a securitization and is considering two possible credit enhancement structures, backed by a pool of auto loans Principal Value Structure I Structure II Pool of automobile loans $304M $301M Senior class $250M $270M Subordinate class $50M $30 Which structure would receive higher credit rating for the senior class and why Which forms of credit enhancement are being used in both structures c) Explain how asset backed securities, mortgage backed securities, and securitization in general provide investors with the functions of financial institutions which are 1) maturity intermediation 2) reducing risk via diversification and 3) reduction of the costs of contracting and information processing (That is securitization results in financial disintermediation)

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Asset Backed Securities a) A financial corporation with a BBB rating has a consumer loan portfolio. An investment banker suggested that this corporation consider issuing

Asset Backed Securities

a) A financial corporation with a BBB rating has a consumer loan portfolio. An investment banker suggested that this corporation consider issuing an ABS where the collateral for the security is the consumer loan portfolio. What would be the advantage of issuing an ABS rather than a straight offering of corporate bonds?

b) A corporation is considering a securitization and is considering two possible credit enhancement structures, backed by a pool of auto-loans.

Principal Value	Structure I	Structure II
Pool of automobile loans	$304M	$301M
Senior class	$250M	$270M
Subordinate class	$50M	$30

Which structure would receive higher credit rating for the senior class and why? Which forms of credit enhancement are being used in both structures?

c) Explain how asset-backed securities, mortgage-backed securities, and securitization in general provide investors with the functions of financial institutions which are 1) maturity intermediation 2) reducing risk via diversification and 3) reduction of the costs of contracting and information processing. (That is securitization results in financial disintermediation)