Question #29
Reading: Reading 28 Credit Analysis Models
PDF File: Reading 28 Credit Analysis Models.pdf
Page: 12
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
Which of the following statements regarding evaluating credit risk of Asset Backed Securities (ABS) is least accurate?
Answer Choices:
A. Unlike for corporate debt, structural and reduced form models are not appropriate
B. The analysis should entail consideration of the composition of the collateral pool and the cash flow waterfall
C. Credit rating agencies do not use the same credit ratings for ABS as for corporate debt
Explanation
Reduced form and structural models can be used as long as they take into account the
complex structure of the ABS. Secured debt is usually financed via a bankruptcy-remote
SPE. This isolation of securitized assets allows for higher credit rating and lower cost to the
issuer.