Financial firms securitise loans for a variety of reasons. A special purpose vehicle will often issue securities of different credit risk $($tranching$)$ because:

Question $2$ Answer

a$.$

This is a good way of confusing regulators and investors as to what is the actual credit risk.

b$.$

It increases the underwriting fees to the sponsoring investment banks.

c$.$

The investors in the equity tranche want to make as much money as possible.

d$.$

It decreases the credit risk of the senior tranche and so increases the pool of potential investors.