Introduction to Structured Finance
Spring 2025 Final
Base your answers to questions 1 through 5 on the sample securitization transaction set forth in the Class 11 Excel Workbook.
Your responses need not be more than one or two paragraphs but must include the rational driving your conclusions. That is, describe what structural/cash flow dynamics you visualize or see as a result of testing the structuring model that led to your conclusions.
Question 1: Under the Case 1 no default/no prepayment scenario, describe the impact of a change in the senior tranche interest rate to 9.00% on i) the average life of the senior tranche, and ii) the residual (subordinate) tranche interest rate.
Question 2: Under the Case 1 no default/no prepayment scenario, describe the impact of a change in the senior/subordinate percentage to 75%/25% (that is, a senior tranche par amount of $56.25MM and a subordinate tranche par amount of $18.75MM) on i) the average life of the senior tranche, and ii) the residual (subordinate) tranche interest rate.
Question 3: Under the Case 1 no default/no prepayment scenario, describe the impact of a change in the blended interest rate of the asset portfolio to 10.25% on i) the average life of the senior tranche, and ii) the residual (subordinate) tranche interest rate. Would the higher blended interest rate of the asset portfolio have an impact on the senior tranche interest rate/yield?
Question 4: Under the Case 2 scenario, what impact would a 10% CPR have on the average life of the senior tranche and the amount of loan loss experienced by the subordinate tranche? What would a logical conclusion be about the expected rate of prepayment generated by an asset portfolio that had a blended interest rate of 10.25% as compared to an asset portfolio that had a blended interest rate of 7.25%?
Question 5: Describe the impact on the subordinate tranche interest rate if it was based on the Case 2 cash flow scenario rather than the Case 1 cash flow scenario. If you were a senior tranche investor, which cash flow scenario would you prefer be used to strike the subordinate tranche interest rate?