In Creating the Various Bond Classes (Or Tranches) in a Securitization

question 32

Multiple Choice

In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest. In regards to the transaction structure of an ABS, which of the below statements is FALSE?

• A) The transaction structure of an ABS is designed to create bond classes with investment characteristics that are less attractive to institutional investors.
• B) In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest.
• C) Credit enhancement levels are determined relative to a specific rating desired by the seller/servicer for a security by each rating agency.
• D) Typically in a securitization, there are at least two classes of bondholders: senior bond classes and subordinate bond classes.

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Definitions:

Agricultural Futures

Contracts to buy or sell agricultural commodities at a predetermined price at a specified time in the future, used for hedging or speculating on the price movement of these commodities.

Actively Traded

Describes securities or assets that are frequently bought and sold, indicating high trading volume.

Orange Juice

A commodity traded on futures markets, representing frozen concentrated orange juice.

Futures Contracts

Legal agreements to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.