Assignment II Essay Example | Topics and Well Written Essays - 500 words

Assignment II - Essay ExampleThis happens in the situation of securitization. The quality of the corroborative can therefore be a credit for investors who can securitize them as many fourth dimensions as they can. course credit enhancement is a technique aimed at reducing default or risk of default. This is done through processes such as prioritizing tranches. Credit risk causes all non-agency securities to engage in credit enhancement. Credit enhancement of securities requires additional support against defaults. Specific security rating agency determines the amount of credit enhancement needed based on specific rating. at that place are two general types of credit enhancement mechanisms namely external and internal credit enhancement mechanisms.Overcollateralization refers to a state in which the collateral mensurate is more than the par value of the issued securities. For instance, if securities of par value $10 million is issued and at collateral carries a market value of $12 million during the time of issuance of the security, there lead be an overcollateralization of $2 million. This process can also be used to absorb losses hence it may coiffe as an internal credit enhancement.Senior-Subordinate Structure enhances credit tranching while the subordinate bond classes support the senior bond classes in terms of credit. For example, bonds are classified advertisement into three classes namely A (Senior), B (Subordinate) and C (Subordinate) with par values of $90million, $8 million and $2 million respectively. Bonds A and B are two credit enhanced by class C.No, the correlation of default among pooled assets doesnt need to be highly positive. A highly positive correlation +1 indicates that assets in a pool face the same level of risk. Therefore, if there is a default in one class of assets then there will be a high chance of default among other assets in the same pool.Assume that there is a pool of loans that have been securitized.