CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true with respect to the characteristics of the various types of asset-backed securities (ABS) that are available?

I. The prepayment rate on manufactured housing-backed securities tends to be significantly less than that on mortgage-backed securities.
II. The level of interest rates is the primary factor in determining the prepayment rate on automobile loan-backed securities.
III. Absolute prepayment rate is applied to the original loan balance of the pool, as opposed to its current balance.
IV. During the lockout period, all interest payments received from the credit card receivables pool are re-loaned to other credit card users (as opposed to being paid out to the ABS investors).
A. I and III
B. II and IV
C. III and IV
Explanation: The level of interest rates is not the primary factor in determining the prepayment rate on automobile loan-backed securities because auto loan amounts are much smaller and have much shorter lives than mortgages. Consequently, the motivation to refinance at lower interest rates (thus increasing the prepayment rate) isn't as pronounced as is the case with mortgages.

During the lockout period, all principal repayments received from the credit card receivables pool are re-loaned out to other credit card users (as opposed to being paid out to the ABS investors).

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