According to the waterfall principle of securitization Question 7Answera.... investors with lower seniority should receive all their cash flows before the ones with the higher seniority receive their cash flows. b.... investors with higher seniority are more likely to be paid later than the ones with lower seniority. c....during the Credit Crisis of 2008/9, assets were over-rated by the credit rating agencies, in particular the more senior tranches. d....the mezzanine tranches of ABSS tended to be the largest ones of these securitized assets.

1) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.

All of the following may be considered causes of the “dark side” of credit except: Group of answer choices B. Operational issues that affect credit assessments can have a systematic effect on the whole consumer portfolio. D. Historical data tends to be consistent and can lead to accurate forecasts. A. Tendency of consumers to default is a product of changing legal and social systems. C. Sharp changes in the economic environment, such as a deep recession.

You recently found out that when the market is in recession, ALL assets seem to suffer from some degree of liquidity problems as there are less trades than usual, and thus it is hard to sell an asset without losing some of its fair value. So, you concluded that at least some portion of liquidity risk must be systematic in nature and therefore it must be compensated by the market. To verify this, you cut the market portfolio in half by the illiquidity measure developed by Amihud (2002) [So that you have one relatively liquid portfolio and one relatively illiquid portfolio. Assume that this measure is reliable.] and calculated the market liquidity risk premium as follows: Market liquidity risk premium = Expected return on the illiquid portfolio - Expected return on the liquid portfolio = [E(RIL) - E(RL)] Then you formed 5 portfolios from the entire market based on liquidity (Amihud measure) and estimate the factor loading β (called liquidity beta) of each portfolio using [RIL - RL] as…