CFA Level I · CFA Level I Exam · Fixed-Income Securitization
Compared with a typical mortgage-backed security issued through a securitization, a covered bond most likely:
A covered bond keeps the assets on the issuer's balance sheet and gives investors recourse to the issuer as well as the pool. Securitizations instead use a true sale to a special purpose entity and pass collateral cash flows, including prepayment risk, to investors.
- Atransfers the credit risk of the loans entirely to investors through a true sale
- Bleaves the assets on the issuer's balance sheet and gives investors recourse to the issuerCorrect
- Chas a pool whose prepayment risk is passed through directly to bondholders
Explanation
Covered bonds keep the cover pool on the issuer's balance sheet and provide recourse to the issuer, so the issuer retains an incentive to maintain asset quality. A true sale and pass-through of prepayments characterize securitizations, where investors bear the pool's cash flow risk. Covered bond payments are typically bullet payments, not pass-through.
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