Credit Risk Management Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Credit Risk Management Exam. Enhance your skills with flashcards, detailed explanations, and a comprehensive quiz format designed for effective learning. Achieve exam readiness!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What does the weighted average coupon (WAC) indicate in a securitized structure?

The average interest rate on a class of loans
The average maturity of the underlying loans
The total amount of principal and interest payments
The risk profile of the loans in the portfolio

The correct answer is: The average interest rate on a class of loans

The weighted average coupon (WAC) serves as a crucial indicator in securitized structures, particularly those related to mortgage-backed securities or other asset-backed securities. It reflects the average interest rate of the loans or mortgages that underpin the securitized asset, weighted by the outstanding principal balances of those loans. This measurement provides investors and analysts with insight into the income generated by the securitized products, allowing them to assess potential cash flow and return characteristics. A higher WAC typically indicates a higher cash inflow from interest payments, which can be attractive to investors, especially in a low-interest-rate environment. Understanding the WAC is essential for evaluating investment performance, pricing, and risk management in the context of the underlying loan performance. The other options provide relevant attributes related to securitized structures but do not specifically define the WAC's role as a simple average of interest rates on loans.