[ 2009 FRM Sample Exam ] Quantitative Analysis Q19

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19. An important step in structuring a securitization is determining an adequate level of credit support or enhancement. Which of the following is NOT one of common credit enhancement forms for securitization transactions?

A. Subordinated tranches of securitization debt

B. Excess Spread account

C. Cash reserve account

D. Sinking fund account

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lalamei

 

Correct answer is Dfficeffice" />

Credit enhancements in securitizations protect investors against taking a loss on their securities when losses occur in the underlying asset pool.  Credit enhancements can be structured in different forms including subordinated tranches of securitization debt, excess spread (interest payments and other fees received on the assets in the pool less the interest payments made on the ABS plus the fee paid the service the assets along with other expenses), cash reserve account, and over-collateralization.

D is correct.  A sinking fund is a pool of money regularly set aside by a company to redeem its bonds, debentures or preferred stock from time to time as specified in the indenture.  A sinking fund is not used a credit enhancement.