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B2 East Bank securitises a $50 million pool of its business loans. The asset backed securities (ABS) issued, as a result, come in 3 tranches of bonds: one $10 million tranche with an AAA rating bought by an insurance company fund, a $25 million tranche with a BB rating bought by a superannuation fund and one tranche $15 million with a CCC rating sold to a managed fund. a) Represent the changes in the balance sheets of the SPV and East Bank. Assume that the SPV is a depositor of East Bank but investors in ABS are not depositors in East Bank. Clearly indicate in the balance sheets the nature of the funds involved and to whom they belong. Assume that the issue of ABS takes place before the purchase of loans. No explanation are required. (6 marks) b) Conclude whether East Bank has less credit risk and more funds, as a result of securitization. Explain your answers in details. (4 marks) c) Identify which securities form the junior, the mezzanine and the senior tranches. Which of the three investors, the insurance company, the superannuation and the managed fund, will receive the interest first? Which of the three investors will be hit first if the loans do not generate enough interest? Explain your answers in details. (3 marks) d) Assume the originator buys all the ABS from the secondary market. Trace the full circulation of the interest generated by the business loans. (2 marks)

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