CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

The amount of overcollateralization changes due to ______.

I. defaults
II. amortization
III. prepayments
Correct Answer: I, II and III

User Contributed Comments 6

User Comment
kodali I can understand the % of over-collaterization changes due to ii and iii. How can the amount change due to ii and iii with out any defaults.
VenkatB Day1:
100 Liability 105 Collateral (105-100)/100 = 5% over-collaterization

Day 180 (After 6 months) : Assume all the payments (total =50) are made as per the amortization schedule

50 Liability 55 Collateral (55-50)/50 = 10% over-collaterization

Day 270 (After 9 months) : Assume payments are made as per the amortization schedule & $10 of prepayment.

15 Liability (it would have been 25 without prepayment) 30 Collateral (30-15)/15 = 100% over-collaterization

Defaults will have the negative effect on the % over-collaterization
joywind why does this have something to do with %?
reganbaha defaults will consume some of the % overcollaterization
quanttrader ii & iii are essentially the same (in this context, default would require higher collateral and therefore not as much overcollaterized- ie collateral used to cover defaults
Fabulous1 The absolute amount would only be changed through default. Amortization and prepayment would change the amount relative to the outstanding obligation
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