July 2008
Beginner
384 pages
9h 52m
English
Content preview from Introduction to Securitization
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KEY POINTS OF THE CHAPTER
• For all CDOs (balance sheet, arbitrage, cash, and synthetic), investors and rating agencies must assess and monitor the quality of the asset pool.
• The quality of the asset pool is measured by two types of tests: asset quality tests and diversity tests.
• Asset quality tests include (1) weighted average rating factor test and (2) minimum and maximum weighted average coupon test.
• The weighted average rating factor (WARF) is a numerical score developed by rating agencies as a measure of the rating quality of the asset pool.
• The weighted average coupon (WAC) test requires that the assets in the portfolio not fall below a specified minimum rate nor exceed a specified maximum rate.
• Diversity tests include (1) concentration limits and (2) minimum diversity score.
• Concentration limits impose limits on the percentage concentration in a particular asset, particular sector, cluster, geographical region, and so on.
• The diversity score is a measure developed by Moody’s to quantify the extent of diversity in a pool.
• Asset and income coverage tests involve overcollateralization and interest coverage triggers that serve as automatic deleverage triggers for a CDO.
• Minimum asset coverage test is provided by the overcollateralization (OC) test, which is imposed as a precondition for the CDO manager to continue to make reinvestments and hence maintain the leverage of the transaction.
• There are OC tests for various bond classes of rated liabilities, ...
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