FRM Part II · FRM Exam Part II · Structured Credit Risk
A risk manager reviews an ABS backed by auto loans with total collateral of $200 million and notes of $180 million, leaving a $20 million equity piece. What is the initial overcollateralization expressed as a percentage of the collateral?
Overcollateralization is the collateral in excess of the issued notes divided by collateral: ($200 million minus $180 million) / $200 million = 10.0%. Using the notes as the base would wrongly give 11.1%.
- A10.0%Correct
- B11.1%
- C9.0%
- D20.0%
Explanation
Overcollateralization = (200 - 180) / 200 = 10.0%. Dividing by the notes gives 11.1%, which uses the wrong base.
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