The Securitization Process

Bonds are issued as part of the securitization process. Which of the following _least likely_ represents a purpose of different bond structures?

Incorrect. This statement is valid. The timing of the cash flows can be spread out through time tranching in order to minimize risks associated with investors paying loans off early through refinancing strategies.

Incorrect. This is a way to improve credit quality by securitizing assets and isolating them from the credit rating of the originating entity. Credit enhancements may be provided to boost ratings in senior tranches.

Correct. This is not a purpose for providing different bond structures. Cash flows are determined by the securitized loans and their corresponding amortization schedules.

Increase cash flows

Improve credit quality

Reduce prepayment risk