PDF Notes: Securitisation

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    What is securitisation?

    Transforms illiquid assets into cash through asset-backed securities.

    What are asset-backed securities (ABS)?

    Securities created from cash flows of pooled loans or receivables.

    How does securitisation benefit banks?

    Increases lending capacity by converting loans into cash.

    What role does the special purpose entity (SPE) play in securitisation?

    Isolates assets from bankruptcy risk, enhancing investor confidence.

    What is the purpose of tranches in securitisation?

    Offers different risk-return profiles to cater to investor preferences.

    How does securitisation affect borrowing costs?

    Lowers costs by providing alternative funding sources.

    What is prepayment risk?

    Risk of cash flows differing from scheduled payments due to early repayments.

    What distinguishes agency RMBS from non-agency RMBS?

    Agency RMBS are backed by government guarantees, while non-agency are not.

    What is a collateralized mortgage obligation (CMO)?

    A security that redistributes prepayment risk among different bond classes.

    What are the two key indicators of CMBS credit performance?

    Debt-service-coverage (DSC) ratio and loan-to-value (LTV) ratio.

    What is a collateralized debt obligation (CDO)?

    A security backed by a diversified pool of debt obligations.

    How do covered bonds differ from ABS?

    Covered bonds have dual recourse and stricter eligibility criteria.

    What is the significance of credit enhancements in non-agency RMBS?

    Improves credit ratings and investor appeal through risk mitigation.

    What happens if interest rates decline regarding prepayment risk?

    Homeowners may refinance, shortening the security's maturity.

    What is the function of the Public Securities Association (PSA) benchmark?

    Measures prepayment rates against a standard for market participants.