ABS

CFA Level II
#1

Hey guys, I am reviewing ABS and convexity. I can’t figure out if the floating-rate tranche of an asset-backed security have positive, negative, or no convexity?

#2

If it’s floating rate, then no convexity.

#3

Thanks. What about an inverse-floater then?

#4

N/M dumb question, I guess I am having trouble w/ the theory behind ABS. I still cannot understand how an excess servicing spread can be used to provide credit enhancements in ABS??? Any ideas?

#5

The excess servicing spread is the difference between the underlying securtiy rate and what the AB Security is paying. Say the pool is of auto loans loaned out at 7%; the ABS might pay 6%…the spread would offer a reserve cushion against slow or non pay in the underlying so that it doesn’t impact the ABS investors initially. This is an overly simple example, but should give you the basic idea.

#6

I agree with Bob on the excess spread. I’ll only add that it is a form of internal credit enhancement.

#7

Excess servicing spread is the spread left over and above after taking care of the servicing and other expenses related to ABS. So basically this will serve as a cushion in bad times and is a kind of a internal credit engancements that firms takeup to get a better rating on their issue. But again it provides limited protection and all the caveats need to be thoroughly scrutinized.

#8

Where is this excess servicing spread from? I don’t think I ever saw this on Schweser notes? Is it from the CFAI book? Thanks

#9

tennisboy Wrote: ------------------------------------------------------- > Where is this excess servicing spread from? > I don’t think I ever saw this on Schweser notes? > Is it from the CFAI book? > > Thanks YES

#10

It is in schweser too.