Consider the following structuring problem. The asset pool exhibits the following properties: WAC = 14%; WAM = 60 months; and an expected loss to default of 5%, given the class/type of loans. There is a servicing fee of 1% and there is a 1% reserve (developed internal to the deal with excess cash flow). This asset pool and structure supports a two class liability: Class A with a coupon of 7% and a subordinate class B with a coupon of 10%. We assume a pricing speed of 1.5 ABS where the average life is 1.98% and have tested for a stress case of 2.5 ABS where the average life is 1.64. Due to the narrow variance of the APRs on the loans, we ignore adverse prepayment effects as immaterial. Use the S&P scale for ratings where an AAA rating has a coverage ratio of at least 5X; AA is 4X; A is 3X; BBB is 1.5 - 2X; with anything less than 1.5X is sub- investment grade.(35 pts. As below)

1. What are the deterministic components of credit enhancement given in this transaction?(2 pts.)
2. Identify two other credit enhancement techniques that could have been used.(2 pts.)
3. Whatisthis"adverseprepaymenteffect"weareignoring?(3pts.)
4. Identify a sizing (in percent) that would resultinClass A being rated AAA and ClassB
5. being BBB.(20 pts.)
6. Hint:Let a = % of deal in Class A and (1-a) be the % of deal in Class B; then WAI = a (7) + (1-a) 10 = 10 - 3a and carry this relation through to see what value of "a" works.
7. Whatistheexcessspreadinthestructureinpartd?(5pts.)
8. If there had been no sizing of the Class A/B structure that could make the deal work, what
9. are two changes that could be made to the structure to salvage a deal?(3 pts.)

Answer rating: 100% (QA)

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