C Answer discussion questions 14 and 15 at the end of What is an

C answer discussion questions 14 and 15 at the end of

This preview shows page 3 - 5 out of 7 pages.

C. Answer discussion questions 14 and 15 at the end of Chapter 14. 14. What is an SPV? How does it differ from a mutual fund? SPV is a legal entity created to hold receivables and issue securities backed by them (asset backed securities, so receivables are collateral) issues securities, uses proceeds to purchase assets (assets are the receivables). mutual fund limited to equity claims, SPV is broader. SPV and mutual funds are considered a conduit for tax purposes – no double taxation. An entity, such as a bank, would have sold its receivables to a specially created SPV, that funds this purchase of receivables by issuing securities in its own name For example, if the receivables are mortgages, the SPV is a mortgage pool, and the asset-backed securities are pass-throughs, CMOs, and mortgage strips adv’s are solving the asset-liability mismatch and avoiding regulatory costs by taking the loans off the balance sheet of originating institution through securitization/modifying the SPV to solve size, relationship, and credit issues The securities issued by a mutual funds, i.e. its shares, are equity claims on the underlying assets of the mutual fund’s portfolio. The securities issued by SPVs, asset-backed-securities, are debt securities, because they are backed by expected repayment of debt due to the SPV (receivables)
Image of page 3

Subscribe to view the full document.

SPV uses the pooling for securitization for liquidity purposes and the mutual fund does it to get some sort of return for its investors. An SPV engages in credit substitution but mutual funds don’t. SPV finances by issuing any kind of securities.” 15. What are the reasons for securitizing each of the following: a. mortgages: banks faced high interest rate risk bc of asset liability mismatch. o securitization turned illiquid loans into securities that could be sold on secondary market. secondary market allowed for origination and servicing to be separated from funding – allowed for banks and thrifts to originate mortgages which they do well, and for long term investors to bear the interest rate risk: solves asset liability mismatch and specialization. o liquidity, asset liability mismatch, specialization (separation of funding and origination), can pool into larger sizes bc individual mortgages too small to trade b. credit card debt, auto loans, and leases consumer loans tend to be small and can have a credit issue. securitization solves the size issue and credit issue. without securitization, individual loans are too small to cover transaction costs and credit of borrowers is not good enough. credit issue: can enhance the credit of SPV pool in some way by credit substitution: guarantees, insurance, etc. size issue: Addressed by pooling the loans into an SPV and issuing large denomination securities backed by the pool, that are large enough to overcome the transaction costs and fixed costs of issuing lots of small individual securities.
Image of page 4
Image of page 5

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes