READING 64 ASSET-BACKED SECURITY (ABS) INSTRUMENT AND MARKET FEATURES

Question 1

Which of the following best distinguishes covered bonds from asset-backed securities (ABS)?

A. Covered bonds are issued by special purpose entities (SPEs)
B. Covered bonds remain on the issuer’s balance sheet
C. Covered bonds are always backed by commercial loans

Answer 1

Correct Answer: B

Explanation:

Covered bonds are different from ABSs in that the assets (cover pool) remain on the issuer’s balance sheet, unlike ABSs where assets are sold to an SPE.

A is incorrect: Covered bonds do not use an SPE.

C is incorrect: Covered bonds are typically backed by mortgage loans, not exclusively commercial loans.

Question 2

Which term describes the situation where covered bondholders can make claims on both the cover pool and other unencumbered issuer assets?

A. Bankruptcy remoteness
B. Dual recourse
C. Credit tranching

Answer 2

Correct Answer: B

Explanation:

Dual recourse means investors can claim repayment from both the cover pool and other unencumbered issuer assets.

A is incorrect: Bankruptcy remoteness applies to ABSs using SPEs, not covered bonds.

C is incorrect: Credit tranching refers to risk-splitting, which is not typical in covered bonds.

Question 3

Covered bonds typically have which of the following characteristics?

A. Assets are removed from the issuer’s balance sheet
B. Credit tranching is used to divide risk
C. The issuer must replace nonperforming or prepaid assets

Answer 3

Correct Answer: C

Explanation:

Covered bond issuers must maintain the value of the cover pool by replacing or augmenting underperforming or prepaid loans.

A is incorrect: The cover pool remains on the balance sheet.

B is incorrect: Covered bonds typically do not involve tranching.

Question 4

In contrast to securitizations involving SPEs, covered bonds offer which of the following?

A. Greater regulatory capital relief
B. Higher yields due to greater risk
C. Recourse to the issuer’s unencumbered assets

Answer 4

Correct Answer: C

Explanation:

Covered bonds offer dual recourse, including access to the issuer’s unencumbered assets.

A is incorrect: Capital relief is not achieved because the cover pool stays on the issuer’s books.

B is incorrect: Covered bonds usually offer lower yields due to lower risk.

Question 5

The term “overcollateralization” in the context of covered bonds refers to:

A. Legal ownership of collateral by investors
B. The collateral value exceeding the bond value
C. Interest payments exceeding coupon rates

Answer 5

Correct Answer: B

Explanation:

Overcollateralization means that the value of the cover pool exceeds the value of the bonds issued.

A is incorrect: Investors don’t legally own the collateral.

C is incorrect: Overcollateralization doesn’t refer to cash flow overages.

Question 6

Which of the following best describes the function of the third-party monitor in covered bonds?

A. Issues bonds to investors
B. Ensures cash flows are distributed to investors
C. Ensures the cover pool meets regulatory and contractual standards

Answer 6

Correct Answer: C

Explanation:

A third-party monitor oversees that the cover pool remains compliant with rules like LTV limits and overcollateralization.

A is incorrect: The issuer sells the bonds.

B is incorrect: That’s generally a trustee function in securitization.

Question 7

A key reason why covered bonds usually offer lower yields than comparable ABSs is:
A. Lack of liquidity
B. Overcollateralization and dual recourse
C. Use of SPEs

Answer 7

Correct Answer: B

Explanation:

Lower yields reflect the lower credit risk due to dual recourse and overcollateralization.

A is incorrect: Covered bonds are relatively liquid.

C is incorrect: Covered bonds do not use SPEs.

Question 8

Which covered bond feature allows missed payments to be delayed for up to a year?

A. Hard bullet structure
B. Soft bullet structure
C. Conditional pass-through structure

Answer 8

Correct Answer: B

Explanation:

A soft bullet allows an extension (e.g., 12 months) before the bond is declared in default.

A is incorrect: Hard bullet triggers default immediately.

C is incorrect: Conditional pass-through activates at maturity if amounts are still unpaid.

Question 9

Which covered bond type becomes a pass-through bond at maturity if principal is still owed?

A. Hard bullet
B. Soft bullet
C. Conditional pass-through

Answer 9

Correct Answer: C

Explanation:

A conditional pass-through bond becomes a pass-through bond if payments are still due at maturity.

A and B don’t transform into pass-through structures.

Question 10

Covered bonds offer less benefit to issuers in terms of:

A. Lower capital requirements
B. Enhanced credit quality
C. On-balance sheet funding

Answer 10

Correct Answer: A

Explanation:

Because the cover pool stays on the balance sheet, capital reserve requirements remain.

B is incorrect: Credit quality is enhanced via overcollateralization and dual recourse.

C is incorrect: On-balance sheet funding is a feature, not a drawback.

Question 11

Covered bonds are most commonly issued by:

A. Insurance companies
B. Central banks
C. Commercial banks

Answer 11

Correct Answer: C

Explanation:

Banks, especially in Europe, Asia, and Australia, are the main issuers of covered bonds.

A and B are not typical issuers.

Question 12

The assets backing a covered bond are referred to as:

A. Trust assets
B. Securitized pool
C. Cover pool

Answer 12

Correct Answer: C

Explanation:

In covered bonds, the cover pool backs the debt.

A is used in securitizations.

B refers to SPEs and ABSs.

Question 13

Which of the following statements is TRUE about covered bonds?

A. They always use tranching to distribute risk.
B. They provide recourse only to the cover pool.
C. They offer investors claims on both the cover pool and the issuer’s unencumbered assets.

Answer 13

Correct Answer: C

Explanation:

Dual recourse = claims on cover pool + other assets of the issuer.

A is false: They don’t typically use tranching.

B is false: They don’t only rely on the cover pool.

Question 14

In the event of default, a hard bullet covered bond:

A. Postpones maturity automatically
B. Becomes a pass-through instrument
C. Is accelerated and due immediately

Answer 14

Correct Answer: C

Explanation:

Hard bullet = immediate acceleration of all payments upon default.

A describes soft bullet.

B describes conditional pass-through.

Question 15

The main regulatory difference between ABSs and covered bonds is that:

A. Covered bonds provide greater capital relief
B. Covered bonds remain on balance sheet and do not reduce required capital
C. ABSs give investors less transparency than covered bonds

Answer 15

Correct Answer: B

Explanation:

Since the assets stay on the issuer’s balance sheet, covered bonds do not reduce capital requirements.

A is false: Securitization (ABSs) reduces capital burden.

C is false: Both can offer high transparency; not the key regulatory difference.

Question 16

Which of the following best describes overcollateralization in an asset-backed security (ABS)?
A. Issuing ABS with multiple tranches to absorb losses.
B. Ensuring the value of the collateral exceeds the face value of the ABS.
C. Replacing defaulted collateral with higher quality assets.

Answer 16

Correct Answer: B
Explanation:

Overcollateralization occurs when the total value of the collateral pool is greater than the face value of the ABS issued. This protects investors from initial credit losses.

Option A refers to credit tranching.

Option C describes a feature of covered bonds, not typical of ABS.

Question 17

What is the primary purpose of excess spread in an ABS structure?
A. To provide a reserve to absorb credit losses.
B. To increase the yield of senior tranches.
C. To ensure liquidity in secondary markets.

Answer 17

Correct Answer: A
Explanation:

Excess spread is the extra income earned on the collateral above what is paid to ABS investors and is used as a buffer against credit losses.

Option B is incorrect because excess spread doesn’t directly increase senior tranche yields.

Option C confuses excess spread with liquidity.

Question 18

What is the role of the equity tranche in a credit tranching structure?
A. It has the first claim on cash flows.
B. It absorbs the first losses from defaults.
C. It offers the highest credit rating in the structure.

Answer 18

Correct Answer: B
Explanation:

The equity tranche (also called the junior or residual tranche) is the first to absorb losses, providing protection to more senior tranches.

Option A describes senior tranches.

Option C is incorrect because the equity tranche has the lowest rating.

Question 19

Which tranche is most protected from credit losses in a subordinated ABS structure?
A. Tranche A
B. Tranche B
C. Tranche C

Answer 19

Correct Answer: A
Explanation:

Tranche A is the most senior and receives payments first, protected by the subordinated B and C tranches.

Option B is less protected and subordinated to A.

Option C is the first to absorb losses.

Question 20

Which internal credit enhancement method involves structuring an ABS with multiple layers of debt claims?
A. Overcollateralization
B. Excess spread
C. Subordination

Answer 20

Correct Answer: C
Explanation:

Subordination, or credit tranching, creates multiple classes of securities with different priorities.

Option A involves more collateral than debt.

Option B involves earning excess interest.

Question 21

Which of the following is least likely a benefit of credit tranching to senior ABS investors?
A. Greater protection against default losses.
B. Higher interest income.
C. Higher credit ratings.

Answer 21

Correct Answer: B
Explanation:

Senior tranches are protected but offer lower yields.

Option A and C are true benefits of credit tranching.

Question 22

In a subordinated structure, what happens when default losses exceed the principal of the equity tranche?
A. The senior tranche begins to take losses.
B. The losses stop accruing.
C. The subordinated tranche absorbs all future losses.

Answer 22

Correct Answer: C
Explanation:

After the equity tranche is exhausted, the next subordinate tranche absorbs losses.

Option A only happens after all subordinated tranches are wiped out.

Option B is incorrect — losses continue.

Question 23

In the context of ABS, what does a waterfall structure imply?
A. Losses are absorbed equally across all tranches.
B. Cash flows and losses are distributed in a hierarchical manner.
C. The structure guarantees full repayment of all tranches.

Answer 23

Correct Answer: B
Explanation:

A waterfall structure distributes payments from top (senior tranches) down, and losses from bottom (junior) up.

Option A is incorrect; losses are not shared equally.

Option C is not guaranteed.

Question 24

Which of the following best explains why senior ABS tranches can have higher credit ratings than the originating company?
A. They have no exposure to the collateral pool.
B. The ABS is backed by corporate guarantees.
C. They are protected by subordinated tranches and bankruptcy-remote structures.

Answer 24

Correct Answer: C
Explanation:

Senior tranches are supported by lower tranches and are isolated from the originator’s financial troubles.

Option A is false — they are exposed to the collateral.

Option B is not a typical feature.

Question 25

A reserve account built from the interest rate difference between the collateral and the ABS coupon is an example of: A. Overcollateralization B. Subordination C. Excess spread

Answer 25

Correct Answer: C Explanation: Excess spread represents the difference between interest received and interest paid, creating a reserve fund. Option A is about excess collateral. Option B is about layered tranches.

Question 26

Which tranche has a residual claim on cash flows after all other obligations are met? A. Senior tranche B. Mezzanine tranche C. Equity tranche

Answer 26

Correct Answer: C Explanation: Equity tranche gets whatever is left after senior and mezzanine are paid. Option A and B receive cash flows earlier.

Question 27

Which method of internal credit enhancement directly reduces the face value exposure of investors to the collateral pool? A. Excess spread B. Subordination C. Overcollateralization

Answer 27

Correct Answer: C Explanation: Overcollateralization lowers investor exposure by ensuring the collateral value is higher than ABS issued. Option A builds a cash buffer. Option B prioritizes claims.

Question 28

The main reason senior ABS tranches have lower yields is: A. They are more liquid. B. They carry higher credit risk. C. They are more protected from losses.

Answer 28

Correct Answer: C Explanation: Senior tranches are lower risk, so they offer lower returns. Option A might be true but isn’t the main reason. Option B is false — they carry lower risk.

Question 29

What typically happens to the coupon payments of a subordinated tranche as credit losses increase? A. Coupon payments increase. B. Coupon payments stay the same. C. Coupon payments decrease as the principal is written down.

Answer 29

Correct Answer: C Explanation: As defaults reduce the principal, interest is calculated on a smaller base. Option A is false. Option B doesn’t reflect the write-down impact.

Question 30

Which of the following best describes a nonamortizing loan used in credit card ABS? A. It has a fixed schedule for principal repayment. B. Borrowers repay principal at their discretion. C. It matures in equal installments over a defined term.

Answer 30

Correct Answer: B Explanation: Nonamortizing loans like credit card debt allow borrowers to repay principal whenever they choose, without a fixed schedule. A is incorrect: A fixed schedule defines an amortizing loan. C is incorrect: Equal installments are typical of amortizing loans, not revolving credit like credit cards.

Question 30

In a senior-subordinated ABS, which of the following best describes the risk borne by the equity tranche? A. Minimal risk due to first claim on assets. B. First to absorb credit losses, bearing the highest risk. C. Risk is shared equally with other tranches.

Answer 30

Correct Answer: B Explanation: The equity tranche is at the bottom and absorbs all initial losses. Option A is false — senior tranches get paid first. Option C doesn’t reflect the structure.

Question 31

What is the main purpose of a lockout (revolving) period in a credit card ABS structure? A. To allow early amortization of the ABS B. To enable investors to receive both interest and principal C. To stabilize the collateral pool by reinvesting principal repayments

Answer 31

Correct Answer: C Explanation: During the lockout period, principal repayments from cardholders are used to purchase new credit card receivables, maintaining a steady pool size. A is incorrect: Early amortization happens after the lockout, typically due to deterioration. B is incorrect: Investors receive only interest and fees during this period.

Question 32

Which of the following is a characteristic of the cash flows to a credit card ABS? A. Fixed monthly principal repayments B. Only interest payments, with no fees C. Interest, fees, and discretionary principal repayments

Answer 32

Correct Answer: C Explanation: The cash flows to a credit card ABS include finance charges (interest), fees, and borrower-controlled principal payments. A is incorrect: There are no fixed principal payments. B is incorrect: Fees are a key part of the cash flow, alongside interest.

Question 33

What credit risk characteristic distinguishes solar ABSs from many other ABS types? A. High borrower default rates B. Loans backed by high-risk corporate receivables C. Loans made to prime homeowners installing renewable energy systems

Answer 33

Correct Answer: C Explanation: Solar ABSs are often backed by loans to creditworthy homeowners, making credit risk generally lower. A is incorrect: Default risk is usually lower, not higher. B is incorrect: These are not corporate receivables but consumer loans.

Question 34

Why are solar ABSs considered attractive to ESG-focused investors? A. They offer higher interest rates than other ABS types B. They help finance renewable energy installations for homeowners C. They reduce exposure to fossil fuel market volatility

Answer 34

Correct Answer: B Explanation: ESG investors are drawn to solar ABSs because they directly support renewable energy adoption. A is incorrect: Yield is not the ESG attraction. C is too indirect; the focus is on promoting renewable solutions, not hedging fossil exposure.

Question 35

What is the role of a pre-funding period in a solar ABS structure? A. To repay investors early if defaults rise B. To allow time to include additional solar loans after issuance C. To limit reinvestment risk by freezing the collateral pool at issuance

Answer 35

Correct Answer: B Explanation: The pre-funding period allows the issuer to gradually add more solar loans post-issuance, supporting diversification. A is incorrect: That’s related to early amortization, not pre-funding. C is incorrect: It does the opposite—it allows ongoing loan additions, not freezing.

Question 36

Which of the following best explains how prepayment risk is handled during the revolving period of a credit card ABS? A. It is transferred to the investors directly B. It is mitigated by using prepayments to buy new receivables C. It is ignored in nonamortizing ABS structures

Answer 36

Correct Answer: B Explanation: During the revolving period, principal repayments are reinvested, eliminating prepayment risk for that phase. A is incorrect: The structure avoids passing prepayment risk to investors during this time. C is incorrect: Prepayment risk still exists but is managed through reinvestment.

Question 37

Which of the following is an example of internal credit enhancement used in ABS structures? A. Bond insurance B. Excess spread C. Reserve fund provided by a third party

Answer 37

Correct Answer: B Explanation: Excess spread (the difference between interest earned on assets and paid on securities) is an internal enhancement. A is incorrect: That’s external credit enhancement. C is incorrect: Reserve funds are external if funded by a third party.

Question 38

What typically triggers the early amortization period in a credit card ABS? A. Excessive borrower prepayments B. Deterioration in credit quality of the receivables C. Completion of the pre-funding period

Answer 38

Correct Answer: B Explanation: Early amortization is triggered to protect investors when credit performance worsens. A is incorrect: Prepayments are handled during the revolving period. C is incorrect: Pre-funding relates to solar ABS, not early amortization triggers.

Question 39

Which statement best describes the repayment of principal in a nonamortizing credit card ABS? A. It occurs on a fixed schedule over the ABS's life B. It begins only after the lockout period ends C. It is paid to investors continuously throughout the lockout period

Answer 39

Correct Answer: B Explanation: Principal is passed to investors only after the lockout/revolving period ends. A is incorrect: There’s no fixed schedule during the lockout. C is incorrect: Principal is reinvested, not passed to investors, during the lockout.

Question 40

Which asset type is most likely to exhibit amortizing behavior? A. Credit card receivables B. Auto loans C. Franchise license payments

Answer 40

Correct Answer: B Explanation: Auto loans have a fixed payment schedule and are typically amortizing. A is incorrect: Credit card debt is nonamortizing. C is incorrect: Franchise royalties may vary and are not typically amortizing.

Question 41

Which of the following best explains why ABS structures aim for a diversified loan pool? A. To improve cash flow predictability B. To maximize interest income C. To increase exposure to prepayment risk

Answer 41

Correct Answer: A Explanation: Diversification reduces the risk that defaults in a small group of borrowers will harm overall cash flows. B is incorrect: Diversification helps manage risk, not maximize return. C is incorrect: Prepayment risk is not increased by diversification.

Question 42

Which of the following describes a characteristic of credit card ABS interest rates? A. They are always floating and uncapped B. They are either fixed or floating and often capped C. They are determined by the central bank

Answer 42

Correct Answer: B Explanation: Credit card receivables in ABS can have fixed or floating interest rates, typically with a cap. A is incorrect: Floating rates are often capped. C is incorrect: Rates are set by lenders, not central banks.

Question 43

What type of collateral typically secures a solar loan in a solar ABS? A. Only the borrower’s income stream B. The solar system or a junior lien on the home C. A senior mortgage on the home

Answer 43

Correct Answer: B Explanation: Solar loans may be secured by the system itself or as a junior lien on the home. A is incorrect: Income alone isn’t the primary security. C is incorrect: Solar loans typically rank below primary mortgages.

Question 44

Which of the following ABS types is yet to be tested through a full credit cycle? A. Credit card ABS B. Auto loan ABS C. Solar ABS

Answer 44

Correct Answer: C Explanation: Solar ABSs are relatively new and have not yet experienced the full range of market conditions (a full credit cycle). A and B are incorrect: These are well-established asset classes with long performance histories.

Question 45

Which of the following best describes the primary role of a collateral manager in a CDO? A. To passively collect payments from a fixed loan pool B. To actively manage the collateral by buying and selling debt securities C. To issue new equity tranches during the life of the CDO

Answer 45

Correct Answer: B Explanation: The collateral manager in a CDO actively manages the portfolio to ensure sufficient cash flows to pay investors. A is incorrect: Passive collection is typical in ABS, not actively managed CDOs. C is incorrect: Tranches are set at issuance; new equity tranches are not added later.

Question 46

Which type of collateralized debt obligation is primarily backed by corporate or emerging market bonds? A. CLO B. CBO C. Synthetic CDO

Answer 46

Correct Answer: B Explanation: CBO stands for Collateralized Bond Obligation and is backed by corporate or emerging market debt. A is incorrect: CLOs are backed by leveraged loans. C is incorrect: Synthetic CDOs use credit derivatives, not physical bonds.

Question 47

Which of the following best characterizes a CLO? A. A structured product backed by municipal bonds B. A CDO with collateral consisting primarily of leveraged bank loans C. A portfolio of AAA-rated consumer credit loans

Answer 47

Correct Answer: B Explanation: CLOs (Collateralized Loan Obligations) are CDOs backed by leveraged (risky) bank loans. A is incorrect: CLOs are not backed by municipal bonds. C is incorrect: CLOs typically include sub-investment grade loans, not AAA consumer credit.

Question 48

Which statement best describes synthetic CLOs? A. They rely solely on the cash flows from real underlying loans B. They gain exposure through credit derivative contracts without owning the loans C. They hold a portfolio of mortgage-backed securities

Answer 48

Correct Answer: B Explanation: Synthetic CLOs use derivatives (e.g., credit default swaps) to replicate loan exposure without owning the actual loans. A is incorrect: That describes cash flow CLOs. C is incorrect: Mortgage-backed securities are unrelated to CLOs.

Question 49

Which type of CLO generates payments primarily through changes in the value of its collateral? A. Cash flow CLO B. Market value CLO C. Synthetic CLO

Answer 49

Correct Answer: B Explanation: Market value CLOs trade loans to profit from market price movements and distribute gains to investors. A is incorrect: Cash flow CLOs use interest/principal income, not price movements. C is incorrect: Synthetic CLOs involve derivatives, not physical loan trading.

Question 50

What is the purpose of overcollateralization in a CLO structure? A. To reduce the interest payments due to junior tranches B. To protect senior tranches by maintaining a buffer of extra collateral C. To enhance trading flexibility of the collateral pool

Answer 50

Correct Answer: B Explanation: Overcollateralization ensures there's more asset value than debt issued, acting as a cushion against losses. A is incorrect: It doesn't reduce payments; it protects payment priority. C is incorrect: Overcollateralization relates to risk protection, not trading flexibility.

Question 51

Which of the following best describes a key protection mechanism for CLO investors? A. Unrated subordinated debt buffer B. Prepayment caps on all tranches C. Prespecified tests such as overcollateralization and diversification rules

Answer 51

Correct Answer: C Explanation: CLOs include specific tests to ensure portfolio quality and reduce default risk. A is incorrect: While equity tranches exist, the question asks for broader protections. B is incorrect: Prepayment caps are not a standard CLO protection.

Question 52

Why did post-2007 CLO structures become simpler and more regulated? A. To reduce investor returns and increase government revenue B. To comply with new rules following the global financial crisis C. To allow inclusion of lower-quality mortgage loans

Answer 52

Correct Answer: B Explanation: After the 2007–2009 crisis, stricter regulations improved transparency and quality of CDO collateral. A is incorrect: The goal was stability, not revenue. C is incorrect: Mortgage loans are not typically part of CLOs.

Question 53

Which characteristic is most associated with leveraged loans, the primary collateral in many CLOs? A. Issued to companies with low credit risk B. Secured, senior loans made to high-debt or low-credit borrowers C. Typically unsecured, short-term retail credit

Answer 53

Correct Answer: B Explanation: Leveraged loans are senior secured loans made to riskier companies (high debt, lower credit quality). A is incorrect: Borrowers are high-risk, not low-risk. C is incorrect: These are commercial, not retail, loans.

Question 54

Which of the following statements is most accurate about tranches in a CDO? A. All tranches receive equal return regardless of risk B. Equity tranches receive the highest returns but also the highest risk C. Senior tranches are the first to absorb losses

Answer 54

Correct Answer: B Explanation: Equity tranches are at the bottom of the payment waterfall — they are last to be paid, so they carry more risk but also the potential for higher returns. A is incorrect: Returns and risks are tiered. C is incorrect: Equity tranches absorb losses first.

Question 55

Which of the following collateral quality tests limits exposure to very risky debt? A. Diversification test B. CCC limitation test C. Payment coverage test

Answer 55

Correct Answer: B Explanation: The CCC limitation test prevents the portfolio from becoming overloaded with highly risky (CCC-rated) debt. A is incorrect: Diversification spreads risk but doesn’t limit specific ratings. C is incorrect: Payment coverage ensures sufficient inflow, not credit quality.

Question 56

How does a payment coverage test protect CLO investors? A. By capping the coupon rate on subordinated tranches B. By ensuring enough cash flow is available to meet scheduled payments C. By requiring only investment-grade collateral

Answer 56

Correct Answer: B Explanation: This test ensures the CLO is generating enough income to pay its investors. A is incorrect: It doesn’t cap coupon rates. C is incorrect: Investment-grade only is not a rule; CLOs hold sub-investment-grade loans too.

Question 57

Which best describes a diversification requirement in a CLO? A. Holding only loans from one sector with different credit ratings B. Holding a mix of loans across sectors and issuers C. Allocating funds across fixed-income and equity securities

Answer 57

Correct Answer: B Explanation: Diversification reduces concentration risk by ensuring the pool is not overexposed to one borrower or industry. A is incorrect: Sector concentration is discouraged. C is incorrect: CLOs hold loans, not equity securities.

Question 58

Why must a CLO manager maintain overcollateralization ratios? A. To ensure the CLO qualifies as investment grade B. To allow reclassification of subordinated debt as senior debt C. To provide a buffer against losses, protecting senior tranches

Answer 58

Correct Answer: C Explanation: Overcollateralization cushions senior tranche holders in case of loan defaults. A is incorrect: CLOs may not be investment grade. B is incorrect: Debt reclassification doesn’t occur in CLOs.

Question 59

What is the main difference between a CLO and a traditional ABS? A. CLOs are backed only by consumer receivables B. CLOs involve active collateral management by a manager C. Traditional ABSs issue only synthetic securities

Answer 59

Correct Answer: B Explanation: CLOs are actively managed by a collateral manager who buys/sells loans to meet performance targets. A is incorrect: CLOs are backed by corporate loans, not consumer receivables. C is incorrect: Synthetic structures are found in both ABS and CLOs, but are not a defining feature.