Understanding Securitization

What is a special purpose vehicle (SPV) in securitization?

• A type of debt security

• A company established to raise funds

• A financial institution

• A large company

What are the benefits of securitization?

• Cheaper borrowing and credit arbitrage

• Increased debt levels

• Higher capital requirements

• Reduced funding sources

How does securitization affect the originator's balance sheet?

• It has no effect on the balance sheet

• It increases the amount of capital required

• It adds more debt to the balance sheet

• It removes receivables from the balance sheet

What is credit arbitrage in the context of securitization?

• Reducing the cost of capital

• Increasing the originator's creditworthiness

• Swapping one credit for another

• Selling receivables at a higher price

What is the purpose of dividing securities into different classes?

• To optimize the risk profile

• To increase the cost of borrowing

• To simplify the payment structure

• To reduce the number of investors

What is the relationship between senior and junior tranches?

• Senior tranches have priority of payment

• Junior tranches have priority of payment

• Both have equal rights

• Senior tranches carry a higher rate of interest

What role does credit rating play in the securitization process?

• It only affects the originator's reputation

• It has no impact on the securitization

• It determines the interest rate on the securities

• It is used to calculate the total assets

What is the primary risk associated with securitization?

• Operational risk

• Market risk

• Liquidity risk

• Credit risk

How can investors benefit from investing in securitized assets?

• Lower risk than equity investments

• Guaranteed returns regardless of market conditions

• Higher returns compared to traditional bonds

• Access to exclusive investment opportunities