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Analyse the process of securitisation including the construction and use of mortgage backed securities and collateralised debt obligations. There is a need for a practical example. The maximum number of words is 1200. The minimum number of words is 800.
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- Explain how mortgage-backed securities, collateralised debt obligations and credit default swaps are constructed and evaluate their applications in financial markets.When bonds and other debt securities are issued, payments such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Rushing International prepares its financial statements using IFRS: a. the recorded amount of the debt is increased by the transaction costs. b. the decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. c. the transaction costs are recorded separately as an asset. d. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.Which of the following statements is false? A. Asset-backed securities (ABS) may be backed by financial assets other than mortgages. B. Residential mortgage-backed securities (RMBS) are backed by mortgages on income producing real estate properties. C. The securitization of financial assets increases the liquidity of the underlying financial assets. D. In a sequential-pay collateralized mortgage obligations (CMOs), all scheduled principal payments and prepayments are paid to each tranche in sequence until that tranche is paid off.
- The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called: a. collateralization. b. securitization. c. market capitalization. d. stock diversification. e. mortgage globalization.Credit Analysis and Lending Management Question: Securitization is the financial practice of pooling various types of contractualdebt, such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations, and selling the pooled debt as securities to investors. Explain the meaning of securitization, how the structure of securitization take place.Which of the following statements correctly describes aspects of simple interest as discussed in lectures? Group of answer choices A. More than one of the other statements are correct B. None of the other statements are correct C. loan that has been created that pays simple interest, will involve interest payments that are calculated on the basis of both the principal amount borrowed as well as any interest that has accumulated to date. D. By convention, simple interest is the main method used for the pricing of short-term debt securities like Treasury Notes. E. With simple interest, the future value of any cash flow is simply its current value discounted back at a rate of r% per period for n periods. I already know that C and D are compound interests however I am not sure about option E.
- You are required to identify and give reasons for the appropriate classification of the debt instruments A and B below: Part A.Macaroon holds certain debt investments to collect their contractual cash flows of interest and principle. The funding needs of the company are predictable and the maturity of such financial assets is matched to Macaroon’s estimated funding needs. Macaroon performs credit risk management activities with the objective of minimising credit losses.In the past, Macaroon has sold some of its debt investments when the credit risk of the financial assets increased beyond the acceptable levels of risk as documented in the company’s investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs. The managers reports to key management personnel focus on the credit quality of the financial assets and the contractual return. Part B.Macaroon holds certain debt investments with specified contractual cash flows of interest and…Name the major types of credit enhancement used for commercial-backed mortgage securities.Using the image attached: a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset)b) Calculate the duration and convexity of the both asset and liability sides;c) If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio; d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation,the bank decides to raise cash (zero duration and zero convexity) from the equity holders.How much cash does the bank need to raise?e) Do you agree with the following statement? Explain why. “The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.
- You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are collateralized securities with first claims in the event of bankruptcy. These bonds are not backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times. During a period of economic growth and in an optimistic environment, the yield spread between US government…A loan refers to a contract where a borrower receives a sum from a lender on the promise of repayment along with interest at a future date. It is the most common instrument of debt financing and a major source of income for the banking industry. Don't take that answer.Don't take that answer.Critically discuss five ways in which banks and/or bond holders can manage the credit risk of the loans or bonds they hold as investment assets.
