Question

for securities back by residential mortgages, the structure that is most likely to provide credit enhancement is :

a. sequential-pay trenches.

b. PAC and support trenches.

c. senior and subordinated tranches.

Answer 1

Answer- option (c)

• Senior and subordinate trenches consists of assets having higher credit ratings than other PAC and sequential trenches.
• These are pooled collection of securities with various diversified portfolios. So that risk factors can be hedge effectively and stable return can be generated to the investors.
• Due to securitization, steady cash flow will be generated for securities backed by mortgages. As a result more credits will be provided.
• Hence debt obligations can be meet in time. It ensures better financial and liquidity position for the business.

Thank you. All the best for your exam!