FIXED INCOME FINAL EXAM
QUESTIONS AND ANSWERS GRADED A+
2025/2026
Securitization - ANS Process that involves moving assets from the owner of the asset into a
special legal entity
Asset-backed security (ABS) - ANS securities that are backed, or collateralized by a pool of
assets, such as loans and receivables
Securitized assets - ANS Assets that are typically used to create ABS bonds include:
residential mortgage loans, commercial mortgage loans, automobile loans, student loans, bank
loans and credit card debt
Mortgage-backed security (MBS) - ANS Asset backed security that is only compromised of
mortgage loans
What are the benefits of securitization for economies and financial markets - ANS -allows
investors to get a direct exposure to a portfolio of mortgages or other receivables without
having a bank as an intermediary
-allows banks to increase the amount of funds available to lend and increase fee income
-allows the creation of tradable securities with better liquidity than the original loans on the
bank's balance sheet
-enables innovation in investment products
**KNOW ALL OF THESE**
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Special purchase vehicle (SPV) - ANS purchases mortgages from financial institutions and
places them on the balance sheet
-where assets are held and sold
What are the main two parties in securitization? - ANS -Originator (seller of collateral):
originally owns the assets and sells them to the issuer (SPV)
-Special purpose vehicle (SPV): creates a security backed by the assets and sells them to
investors
Time tranching - ANS A structure of bonds issued in securitization- rules will be established
for the distribution of interest and principal to the bond classes. Some bond classes may receive
payments earlier than others (redistributes cash flows)
Credit Tranching - ANS A structure of bonds issued in securitization - in a subordination
structure the bond classes differ as to how they will share any losses resulting from defaults of
the borrowers whose loans are in the pool of loans
*redistributes the credit risk of the collateral (underlying asset)
What is a residential mortgage loan - ANS a loan secured by the collateral of some specified
real estate property that obliges the borrower to make a predetermined series of payments to
the lender
What are the 3 forms of residential mortgage backed securities? - ANS 1. those guaranteed
by a government owned corporation (Ginnie Mae)
2. Those guaranteed by a government sponsored agency (GSE included Fanny Mae and Freddie
Mac
What are mortgage pass through securities? - ANS a security created when one or more
holders of mortgages form a pool of mortgages and sell shares or participation certificates in
the pool
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, -holders of pass through securities receive pro-rata payments (do not incorporate concept of
time or credit tranching)
-are created when one or more holders of mortgages form a pool of mortgages and sell shares
or participation certificates in the pool. The cash flow of a mortgage pass through security
depends on the cash flow of the underlying pool of mortgages
What is prepayment risk and its components? - ANS the uncertainty of future cash flows
because of prepayments
Components:
contraction risk- the risk that when interest rates decline, the security will have a shorter
maturity than was anticipated at the time of purchase because homeowners refinance at lower
(market) interest rates
Extension risk: the risk that when interest rates rise, fewer prepayments will occur because
homeowners are reluctant to give up the benefits of a contractual interest rate that is lower
than market rates
What are collateralized mortgage obligations - ANS are bond classes created by redirecting
the interest and principal from a pool of mortgage pass through securities or whole loans
What is corporate debt? - ANS Companies raise debt as a part of their overall capital
structure, both to fund short term spending needs (working capital) as well as long term capital
investments
Sources of debt - ANS -bilateral and syndicated loans
-commercial paper
-corporate bonds
What are bank loans - ANS bilateral loan: from a single lender to a single borrower
-bank loans are the primary source of debt for small and medium size companies, as well as
large companies in countries where bond markets are less developed
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
QUESTIONS AND ANSWERS GRADED A+
2025/2026
Securitization - ANS Process that involves moving assets from the owner of the asset into a
special legal entity
Asset-backed security (ABS) - ANS securities that are backed, or collateralized by a pool of
assets, such as loans and receivables
Securitized assets - ANS Assets that are typically used to create ABS bonds include:
residential mortgage loans, commercial mortgage loans, automobile loans, student loans, bank
loans and credit card debt
Mortgage-backed security (MBS) - ANS Asset backed security that is only compromised of
mortgage loans
What are the benefits of securitization for economies and financial markets - ANS -allows
investors to get a direct exposure to a portfolio of mortgages or other receivables without
having a bank as an intermediary
-allows banks to increase the amount of funds available to lend and increase fee income
-allows the creation of tradable securities with better liquidity than the original loans on the
bank's balance sheet
-enables innovation in investment products
**KNOW ALL OF THESE**
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Special purchase vehicle (SPV) - ANS purchases mortgages from financial institutions and
places them on the balance sheet
-where assets are held and sold
What are the main two parties in securitization? - ANS -Originator (seller of collateral):
originally owns the assets and sells them to the issuer (SPV)
-Special purpose vehicle (SPV): creates a security backed by the assets and sells them to
investors
Time tranching - ANS A structure of bonds issued in securitization- rules will be established
for the distribution of interest and principal to the bond classes. Some bond classes may receive
payments earlier than others (redistributes cash flows)
Credit Tranching - ANS A structure of bonds issued in securitization - in a subordination
structure the bond classes differ as to how they will share any losses resulting from defaults of
the borrowers whose loans are in the pool of loans
*redistributes the credit risk of the collateral (underlying asset)
What is a residential mortgage loan - ANS a loan secured by the collateral of some specified
real estate property that obliges the borrower to make a predetermined series of payments to
the lender
What are the 3 forms of residential mortgage backed securities? - ANS 1. those guaranteed
by a government owned corporation (Ginnie Mae)
2. Those guaranteed by a government sponsored agency (GSE included Fanny Mae and Freddie
Mac
What are mortgage pass through securities? - ANS a security created when one or more
holders of mortgages form a pool of mortgages and sell shares or participation certificates in
the pool
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, -holders of pass through securities receive pro-rata payments (do not incorporate concept of
time or credit tranching)
-are created when one or more holders of mortgages form a pool of mortgages and sell shares
or participation certificates in the pool. The cash flow of a mortgage pass through security
depends on the cash flow of the underlying pool of mortgages
What is prepayment risk and its components? - ANS the uncertainty of future cash flows
because of prepayments
Components:
contraction risk- the risk that when interest rates decline, the security will have a shorter
maturity than was anticipated at the time of purchase because homeowners refinance at lower
(market) interest rates
Extension risk: the risk that when interest rates rise, fewer prepayments will occur because
homeowners are reluctant to give up the benefits of a contractual interest rate that is lower
than market rates
What are collateralized mortgage obligations - ANS are bond classes created by redirecting
the interest and principal from a pool of mortgage pass through securities or whole loans
What is corporate debt? - ANS Companies raise debt as a part of their overall capital
structure, both to fund short term spending needs (working capital) as well as long term capital
investments
Sources of debt - ANS -bilateral and syndicated loans
-commercial paper
-corporate bonds
What are bank loans - ANS bilateral loan: from a single lender to a single borrower
-bank loans are the primary source of debt for small and medium size companies, as well as
large companies in countries where bond markets are less developed
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
