CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features
A credit card ABS has a pool of 500 million of receivables. Over a month, the portfolio yield is 1.5% (of the pool), charge-offs are 0.4%, and the servicing fee is 0.1% (monthly). Investor coupon cost is 0.6% monthly. Excess spread for the month is closest to:
Excess spread is portfolio yield less charge-offs, servicing fee and investor coupon: 1.5% − 0.4% − 0.1% − 0.6% = 0.4% for the month. It serves as the first line of credit protection for the investors.
- A0.4%Correct
- B0.6%
- C1.0%
Explanation
Excess spread = portfolio yield − charge-offs − servicing fee − investor coupon = 1.5% − 0.4% − 0.1% − 0.6% = 0.4%. Omitting the charge-offs gives 0.8%, and omitting the coupon too is incorrect; 0.6% results from ignoring the servicing fee and charge-offs incorrectly combined.
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