A corporation is considering a securitization and is considering two possible credit enhancement structures backed by...

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Finance

A corporation is considering a securitization and isconsidering two possible credit enhancement structures backed by apool of automobile loans. Total principal value underlying theasset-backed security is $300 million.
Principal Value for:
Structure I
Structure II
Pool of automobile loans
$301 million
$305 million
Senior class
$280 million
$270 million
Subordinated class
$20 million
$30 million
Answer the below questions.
(a) Which structure would receive a higher credit ratingand why?
b) What forms of credit enhancement are being used inboth structures?

Answer & Explanation Solved by verified expert

3.6 Ratings (298 Votes)

a The Senior class of structure 2 will receive a higher credit rating as more collateral is posted than the original amount of the loan This rating is based on over collateralization Generally a subordinated class will See Answer

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Transcribed Image Text

A corporation is considering a securitization and isconsidering two possible credit enhancement structures backed by apool of automobile loans. Total principal value underlying theasset-backed security is $300 million.Principal Value for:Structure IStructure IIPool of automobile loans$301 million$305 millionSenior class$280 million$270 millionSubordinated class$20 million$30 millionAnswer the below questions.(a) Which structure would receive a higher credit ratingand why?b) What forms of credit enhancement are being used inboth structures?

Principal Value for:	Structure I	Structure II
Pool of automobile loans	$301 million	$305 million
Senior class	$280 million	$270 million
Subordinated class	$20 million	$30 million