CFA Level I · CFA Level I Exam · Fixed-Income Securitization
An ABS issues bonds with a par value of 80 million supported by a collateral pool with a current balance of 100 million. The pool then suffers credit losses of 12 million, and no other credit enhancement exists. The amount of the collateral shortfall the bondholders face is closest to:
The shortfall is closest to 0 million. The 20 million of overcollateralization absorbs the 12 million of losses, leaving 88 million of collateral against 80 million of bonds. Bondholders are still fully covered, so no shortfall arises.
- A0 millionCorrect
- B8 million
- C12 million
Explanation
Overcollateralization is 100 - 80 = 20 million. Losses of 12 million leave 88 million of collateral, which still exceeds the 80 million of bonds. So bondholders face no shortfall. Choosing 12 million ignores the cushion, and 8 million is the excess left over after losses.
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