- Which of the following statements is incorrect? A) Waterfall is a distribution mechanism providing an order of distributions to LPs first before the GP receives carried interest. B) The creation of bond classes in MBS is referred to as prepayment tranching. C) Waterfall is a distribution mechanism providing an order of distributions to security holders in a securitization of asset based securities.
A, while I can see that people may not choose this bc in equity analysis, there is a waterfall analysis but it doesnt just go to the LP/GP, rather its for all classes of equity holders, including those holding warrants/options.
I agree with above. A
B) The creation of bond classes in MBS is referred to as prepayment tranching. Isnt this “credit Tranching”. I would say B
Credit doesn’t figure into Agency scrips because they’re backed by full faith. Credit comes only in CDS which are packaged into CDO’s . MBS are assumed to be credit-risk free , only risks ( apart from liquidity ) is Prepayment
credit tranching would be removing “credit risk” via a senior-subordinated agreement… be careful with the differences btw credit and prepayment tranching structure, they were in the CFAI FI vingette B is correct as is. Example of Credit/Prepayment Bond A1- SENIOR A2- SENIOR B1- SUBORDINATED multiclass structure = prepayment tranching senior/sub structure = credit
Correct answer is B.
sweet! could you post the explanation or qbank #? thanks!!