Executive Finance And Strategy 1st Edition Ralph Tiffin - Solutions

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9. Quantitative analysis of RMBS:a. Define, formally, the concept of duration with respect to a security.b. How are duration and average life different?c. Why are their meanings frequently confused in practice?d. Define convexity formally.e. Starting from the formal definition of the price P of a
8. What is a Z-bond? What is an accretion-directed bond? Explain its structural features in terms of concepts already introduced in this chapter.
7. Chapter 10 offers two approximations to pricing bonds in the secondary market(equations 8 and 9). What is the difference between them? Why is equation (9)of specific relevance to this chapter, which discusses the internal hedging of prepayment risk?
6. Contingent pricing theory holds that the fair value of an option (call or put)on uncertain cash flows is a function of its intrinsic value plus the price of uncertainty at the time the option’s price is computed. The Black–Scholes theorem defines the price of uncertainty c as the mean value
5. Discuss prepayment dynamics in the context of mortgage-backed securities for the length of an entire transaction. Contrast this discussion with the prepayment dynamics of automobile-loan-backed securities for the length of an entire transaction. Contrast prepayments within MBS and ABS in general.
4. Imagine that a pool of fixed rate loans or bonds is stripped into interest-only and principal-only cash flows, which are then repackaged as IOs and POs, respectively, and that these securities are purchased by a new investor. Would the aggregate price the new investor pays be equal to the
3. This chapter discusses Interest-Only securities (IOs) in the context of PAC IOs.How do IOs work? Contrast the economics of IOs with that of Principal-Only securities (POs).
1. Definitions:a. What does PAC stand for?b. What does TAC stand for?c. How is the P in PAC implemented, and where can you find it?d. Why would anyone buy a PAC bond?e. PAC bonds usually come in pairs. Please name the two members of the pair.f. What types of risk is the PAC designed to address?g.
10. The chapter refers to hedging against the interest rate shifts that can motivate borrowers to refinance certain types of loans (strategic prepayment). How can a portfolio manager use hedging to mitigate the portfolio impacts of strategic prepayment in an environment of declining interest rates?
9. The term prepayment risk is sometimes confused with reinvestment risk. Please define the meaning and the funding impact of each type of risk.
8. Calculate the default rate (in SMM units) of a pool if monthly defaults are given as the following percentages of the SDA profile in figure 10.6 for the first 12 months of the pool’s life: 100% SDA, 120% SDA, 99% SDA, 110% SDA, 125% SDA, 130% SDA, 135% SDA, 120% SDA, 170% SDA, 175% SDA, 225%
7. Explain how the changes in macroeconomic conditions shown in table 10.3 would affect the prepayment rate of fixed-rate mortgages.
6. Explain the phenomenon of burnout and various ways to model it. What are the strengths and weaknesses of each of these different methods? Under what conditions may we be able to neglect burnout?
5. What causes seasonality patterns in turnover and refinancing behavior of mortgage borrowers? How about in the behavior of auto-loan borrowers?
4. How would prepayment patterns for auto loans be different in a country where average auto loan payments were a higher percentage of disposable income than they are in the U.S.?
3. Using table 10.2 calculate the total single-month mortality prepayment rate that results if voluntary prepayments and defaults are as shown in table 10.2.
2. Assume that the prepayment history of a particular pool is given (in terms of PSA) for the first 12 months after the loans were originated as: 186 PSA,122 PSA, 241 PSA, 177 PSA, 135 PSA, 111 PSA, 98 PSA, 86 PSA, 122 PSA, 131 PSA, 129 PSA, 144 PSA. What is the arithmetic average of prepayments on
1. Derive the monthly series of SMM(t) that results from table 10.1, representing monthly cash flows from an arbitrary mortgage pool.
4, and 5 above to be identical?
6. Would you expect security ratings produced under the treatments in questions 1,
5. Suppose you defined the rating as a security-level expected loss. How would you implement this definition in your cash flow model? What numerical benchmarks would you use as a mapping for the ratings?
4. Suppose you defined the rating as a probability of default, not a reductionof-yield. How would you implement this definition in your cash flow model?What numerical benchmarks would you use as a mapping for the ratings?
3. Using the same assumptions as in question 1, model the two-tranche transaction using an IDFM based on (a) the beta; (b) the normal; and (c) the gamma distributions. How do the ratings on the A and B classes compare with in these three treatments?
2. How did you select the input mean and standard deviation (SD) for the default rate? What happens to the DIRR outputs when the SD you choose is very large?or very small?
1. Implement a Monte Carlo simulation engine inside the cash flow model(chapter 7, question 8). Which loss distribution did you select, and why?
12. Are the ramp-up and revolving period risks associated with non-PVA structures fully addressed by the credit enhancement of structures like nonamortizing CDOs, ABCP conduits and SIVs? How would you answer this question?
11. Contrast the principal write-down process for fully funded CLNs, described in section 8.5, with the principal amortization process in cash structured transactions described in chapter 7. What does the difference between the two processes (if any) signify?
10. Describe the typology, organization, and capital resources of synthetic securitizations.What is their economic rationale?
9. What is a trigger? Discuss the differences in how triggers are crafted for cash flow and market value CDOs. Why do CDO structures tend to make broader use of triggers, generally, than ABS and RMBS?
8. Ratings have been poor predictors of performance of CDOs, ever since they were first invented. Identify some of the factors that contribute to a basis risk between the rating and the actual risk.
7. Contrast the differences in the conventions of measuring and managing the risks of ABSs and CDOs.
6. Describe the typology, organization, and capital resources of Collateralized Debt Obligations (CDOs). To what degree does a CDO resemble other structured vehicles, and in which respects is it unique?
5. Table 8.2 shows the terms of credit cards offered in a given market. Choose one card type (1–28) and discuss the CCMT structure you would build around it:
4. What are the key drivers of risk in credit cards? What are the key structural protections of the CCMT?
3. Describe the typology, organization, and capital resources of the Credit Card Master Trust (CCMT). To what degree does it resemble other structured vehicles, and in which respects is it unique?
2. What is prefunding? Is it a form of “revolving?” What is the economic purpose of prefunding?
1. What do the abbreviations of the revolving transactions in structured finance stand for? What is their profile of risk/return? What is their raison d’être?
11. Additional questions related to the cash flow model from question 8:a) Howhigh does the collateral default rate have to go before the ClassBsuffers a reduction of yield? Is it the same in the pro rata and sequential cases? At the collateral default rate where the Class B loses yield, how much
10. Use the BOTE method to find the rating on the Class A and Class B securities in question 8. What additional information does this result give you about the transaction you just modeled?
9. How would you modify the sequential-pay Class B principal due formula to calculate the amount of monthly principal due on a sequential-pay Class C?
8. Using the formatting concepts and the algebra of assets and liabilities introduced in chapters 6 and 7, build a cash flow model of a transaction with these parameters:
7. What is the usefulness of these summary statistics in the cash flow model:scenario loss, yield to maturity, and security average life?
6. What is the residual payment? How would you characterize its risk–return features? How would you value it?
5. State the formula for Class B principal due sequential in words and explain its meaning as a string of conditional statements. Change the formula so that it is true for all subordinated tranches that rank sequentially.
4. What is the rationale for the convention, in certain transactions, of matching interest inflows to interest outflows and principal inflows to principal outflows, the so-called “specified waterfall?” Please discuss the rationale and the justification for this practice.
3. What is the relationship between the assets and the liabilities on the balance sheet of an SPE?
2. Explain, first in words, then mathematically, and finally with respect to their impact on the risk/return features of senior and subordinated tranches, the differences between sequential, pro rata and pari passu pro rata.
1. What is a pass-through security? A pay-through security? An investmentholding company? A corporation? Why do such distinctions in terminology matter in a chapter on liability analysis?
8. Explain the meaning of the terms allocation and distribution in simple English.Which items in the cash flow summaries relate to liability-side allocation, and which to liability-side distribution?
7. Show the formula for the level pay loan amount as the sum of current interest and current principal. Subtracting the interest amount from M gives you an alternative formulation for the principal portion of the level payment. What is it? Describe the meaning of principal in words, using these two
6. Derive the formula for current balances using the formula for the level pay loan amount.
5. How are recoveries treated in the version of the cash flow model introduced in this chapter? What is the limitation of this approach? How much information is lost as a result of using this approach? Would your answer vary by the type of collateral being securitized? How would it do so?
4. Characterize the differences between the formulas for estimating defaults and for estimating prepayments in this chapter. What are the limitations of each?
3. What is a logistic function? What is its characteristic shape? Why has it become the accepted norm in describing the pattern of cumulative defaults and losses on static pools? Explain the significance of each element in the formula for the cumulative loss curve provided in this chapter.
2. Characterize the differences between the empirical and theoretical “expected loss.”
1. Describe the desiderata and organization of information for building a cash flow model of a structured finance transaction. Does it make a difference to your answer if the transaction is a repackaging of risky or riskless cash flows?(What is a “riskless” cash flow?)
9. Find the E(L) on the collateral backing transaction XYZ by referencing the following classes of securities issued from the SPE and their assigned ratings:Class A 85.0% AAA Class B 6.5% A Class C 5.0% BB Equity 3.5% N/R
8. Discuss the differences in valuation approaches for different structured finance vehicles, as described in chapter 8.
7. What is a static pool? Why is it the analytical basis for securitization? What is a loss curve? How is the empirical loss curve constructed? What is the difference between a loss curve and a loss distribution?
6. Name the key inputs into a rating or valuation model and explain how to obtain them.
5. Identify the states of credit impairment, from incipience to resolution. Discuss how miscategorization of loan status can alter its financial value. Identify various tactics for masking loan quality that have been discussed in this chapter, and name the laws or regulations put in place to
4. Someone once referred to the difference between corporate and structured finance as “sampling with and without replacement.” In what sense might this be an apt description? What impact does it have on the measurement of risk and return in structured securities?
3. Identify the key source material used in structuring and valuing structured transactions. Classify each type of material as to: (a) its informational importance, and (b) its degree and type of regulatory supervision.
2. Describe the learning stages of structured credit judgment. What are your natural strengths and weaknesses? Knowing your own strengths and weaknesses, how do you propose to develop yourself as a structured analyst or structured transactor?
1. What is credit judgment in structured finance? Why and how does it matter?
10. Pool C provides the collateral backing a transaction with this capital structure:• $100 transaction with a senior sub-structure• WAC = 12%• $80 of Class A Notes issued at par, coupon = 6%• $20 of Class B Notes issued at par, coupon = 11%• AL of Class A Notes = 1.5 years• AL of Class
9. A banker shows you the vintage data on three static pools (table 4.3). Please construct the base curve for Pool C (express it as a percentage of absolute loss rather than as a percentage of aggregate cumulative loss) and explain your method. Normalize the curve from 0 to 100% when you are
8. Even after the third attempt to rate the sample transaction using the BOTE we are not entirely finished, since the results tell us we can “optimize” the design by restructuring ad hoc. Why and how would you propose to do this? What is the result when you carry out your proposal? What is the
7. Explain the following statement: Given that the BOTE model was used to rate the transaction, it should be possible using the capital structure and ratings on each tranche to back out the expected loss, which should be the same expected loss for each tranche.
6. Choose a deal prospectus and use the BOTE to solve for the expected loss given the structure and the ratings.
5. Define asset-liability parity, first in economic, then in legal and finally in mathematical terms.
4. Define E(L) (expected loss) and identify which part of the capital structure the E(L) in the BOTE formula refers to?
3. What measures of risk and return are incorporated in the BOTE value concept?What are the pluses and minuses of this conception of risk and return?
2. Describe the essential features and delineate the steps of the BOTE approach.What problems does it solve?
1. You are an investor in the Class A or Class B tranche. All you know about the underlying risk/return characteristics of the pool is that the WAC is the risk free rate + 4%. What is your optimal class size and class interest rate, given what you know.
8. Referencing the discussion of the operational platform to that of the regulatory platform (chapter 2), characterize the suitability of the regulatory infrastructure to regulate the operations under its jurisdiction. In what functions do the biggest gaps arise? Contrast this analysis with your
7. Identify the defining macro-level features of the structured finance marketplace.Compare and contrast these to the macro-level features of other capital market sectors in advanced economies.
6. Describe the main financial events in the calendar of a structured security and describe the underlying activities. What would be the impact of disruptions to the calendar at these event-times, and what parties mainly would be affected?
5. Choose a deal prospectus and analyze it using the transaction diagram format.Array “asset-side” functions to the left of the divide between the issuer’s assets and liabilities, and “liability-side” functions to the right of the divide.
4. Who is the issuer of a structured security?
3. Review the role of each agent in securitization, classifying them by the degree of discretion they have over the resources they manage. How does your analysis change for revolving deals? Identify the critical weaknesses in the design of the agents’ functions and propose mitigants to those
2. Explain the role of each of the six types of market player (buyers, sellers, etc.)and fit them to the main functions carried out in securitization markets.
1. Why do the authors characterize securitization as a “deconstruction” of the corporate operating platform? What are the potential benefits or gains for companies, of separating the operating and financing functions: (a) in the statement of cash flows (SFAS 95, 1987); and (b) operationally via
6. What does GAAP say about fair value and fair value measurement?
5. What feature of the GAAP framework is incompatible with the principles of risk measurement in securitization?
4. Characterize the taxonomy of reporting requirements for suppliers and seekers of capital underGAAP.Contrast this with the customary reporting requirements in structured finance and securitization.
3. Debate the authors’ assertion that “even the most primitive risk measurement environment” within the framework of structured finance is superior to that of securitization accounting today.
2. Identify the most important securitization accounting standards under GAAP and explain how they function.
1. Identify the key components of the structure of the U.S. accounting authority, the FASB, and the accounting framework, GAAP. Do its rulings and disclosure requirements have the effect of law? What are the consequences of violating GAAP?
7. What is the role of the Federal Deposit Insurance Corporation in the U.S.financial system? Does the FDIC have a right to undo securitizations assembled by banks in FDIC receivership?
6. How does the Securities & Exchange Commission regulate securitization?How does the Federal Reserve System regulate securitization? Characterize the philosophies of regulation for each institution. What is the significance of recent changes to the framework of regulation following the subprime
5. Define the term recourse. Discuss the differences in meaning from the legal and economic standpoints, giving examples of both and highlighting where the legal and economic meanings do not overlap. What does the presence of recourse do to a securitization transaction?
4. Name the international accountancy standards organizations and describe the role they play in securitization. Do the same for the international derivatives standards organization.
3. Do credit rating agencies have a regulatory role in securitization? Which ratings agencies—what role?
2. What is the impact of such differences on the practice of securitization from a legal standpoint? What are the disadvantages and advantages of each system, from a multiplicity of policy and economic perspectives?
1. What is the fundamental jurisprudential difference between legal systems based on a Civil Code framework of law and the Anglo-Saxon system? Name national markets that engage in securitization and characterize their legal underpinnings from a systems standpoint.
Structure or pure financial strategies– Is this your role?– What is the effect of a pure financial strategy on operational strategies?– Is a financial strategy linked to the operational strategies or does it just happen in isolation?
Investment appraisal– What is your investment strategy – is it tested properly?– Is there adequate investment appraisal guidance?– Are investment decisions consistent and coherent?
Budgeting– Does your process deliver?
Internal reports – management accounts– Are reports clear and actionable?

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Executive Finance And Strategy 1st Edition Ralph Tiffin - Solutions

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