ACCA/CAT

Question Three

This question required candidates to calculate the returns （income）receivable by investors for each of three tranches of a collateralised loan obligation （CLO）security （part （a））；to explain why and how the credit rating of the CLO security can be enhanced （part （b））；and finally to discuss the risks that the investors of the CLO security would face.

Overall this question was the least popular of the three optional questions and also answered less well compared to questions four and five.

In part （a），common errors included not calculating the income inflow and outflow correctly，not knowing how to treat the service charges correctly and in a few cases not treating the impact of the swap correctly. Very few answers attempted to estimate the sensitivity of the subordinated certificates to a fall in returns generated by the pool. But most of the answers in part （a）estimated the cash flows related to the A-rated and B-rated bonds correctly.

In part （b）few answers were able to explain the purpose of credit enhancement，which was basically to convert a high risk cash flow into a varying range of tranches of different risks. Most answers explained the role of credit rating agencies in credit enhancement，but few answers considered the impact of tranching and of over-collateralisation （in this case only 95% of the pool value was used as collateral） as alternative methods of credit enhancement.

In part （c）most answers discussed default and collateral risk quite well but fewer answers considered timing and liquidity risk，and correlation risk.

It is surprising that this question was not more popular given the recent financial crisis and its ramifications which continue to affect most of the economies in the world. The P4 syllabus highlights the need for candidates to be familiar with emerging issues in finance and their impact on the financial management activity in companies. It is advisable for candidates to be knowledgeable about the continuing development of finance. Securitisation is an alternative to the more traditional methods of raising finance and it is likely that different forms of securities will continue to be developed.

（责任编辑：中大编辑）

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