Credit Risk Management Practice Exam

In contrast to a master trust, what is the primary characteristic of a traditional trust?

1. It allows frequent issuances

2. It is typically used for single issuances

3. It requires higher levels of over-collateralization

4. It involves only the originator and no investors

The correct answer is: It is typically used for single issuances

A traditional trust is primarily characterized by its use for single issuances, meaning that it is set up to manage the assets and facilitate a specific transaction or series of transactions tied to a single financing event. This structure simplifies the administration of the trust and focuses on the unique set of collateral or assets tied to that specific issuance. In contrast, a master trust is designed to allow multiple issuances over time, where various tranches of securities can be issued without needing to create entirely new trusts for each transaction. This flexibility supports ongoing financing and capital management activities within the same trust framework. The other options relate to different functionalities or requirements that may not align with the fundamental nature of a traditional trust. Traditional trusts do not typically emphasize over-collateralization, do not necessarily limit the involvement to only the originator without investors, and do not facilitate the frequent issuance characteristic of master trusts. Thus, the defining aspect of traditional trust structures is indeed their association with single issuances.