UNIT 1 ASSIGNMENT As a finance employee in a municipality, you have been informed that a separate $85 million pension fund for the municipality’s firefighters will be carved out of the municipality’s...

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UNIT 1 ASSIGNMENT As a finance employee in a municipality, you have been informed that a separate $85 million pension fund for the municipality’s firefighters will be carved out of the municipality’s pension fund. The newly formed Firefighter’s Pension Investment Committee is interested in investing up to $25 million of pension assets in asset-backed securities to mature in 10 years so that they can be disbursed to a fund for payment to retired firefighters. Your task is to make a presentation of 600–800 words to the Committee explaining the different types of ABS for the Committee's consideration. The presentation must include the following: • A discussion of at least 3 important types of ABS, including MBS • 2 specific, real-world examples of asset-backed securities with appropriate maturities and how they compare to a Treasury security of the same maturity in terms of the spread over the Treasury yield • A discussion of the third risk that exists for MBS investors in addition to the credit and interest rate risks faced by all bondholders, as well as which kind of MBS would be the most appropriate for the pension fund given its 10-year horizon for disbursing funds • At least 2 outside sources
Answered Same DayJun 26, 2021

Answer To: UNIT 1 ASSIGNMENT As a finance employee in a municipality, you have been informed that a separate...

Komalavalli answered on Jun 28 2021
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Introduction:
Two main types of asset class securities are Asset backed securities (ABS) and mortgage backed securities (MBS).ABS is evolve out of mortgage backed securit
ies and it is created from pooling of non mortgage assets like auto loans, study loans, aircraft lease, business loans, credit card receivables etc, those assets represent an obligation to pay. Mortgage backed securities are created from pooling of mortgage assets.
Three main types of Asset backed security
Auto loan ABS:
Auto asset backed securities are collateralized by auto leases or loans to good credit standing consumer (prime) and poor credit standing consumers (subprime).Payments received on the underlying assets are pooled in trust and these funds are used to pay note investors in their respective interest and principal when due. The excess amount that left after this payment known as excess spread. These excess spread or net interest margins are paid to the equity holder.
Types of Auto ABS risk:
The types of ABS risk are prepayment risk, Residual value risk and credit risk (default risk).
Prepayment risk Auto ABS risk: In a low interest rate environment, borrowers may pay their loans for a reduced rate and unscheduled return of principal by the borrowers of the underlying auto loans. Auto ABS usually experience low prepayment risk due to short term auto loans usually have a maturity of 30-60 months and the decreasing residual value will make refinancing too costly for the borrower even in a falling interest rate environment.
Credit risk: The interest rate and principal due of auto loans will not generate enough cash flows for full settlement of the investor in a timely manner. This is also known as...
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