Securitization occurs when receivables are bundled together and sold or transfer
ID: 2480912 • Letter: S
Question
Securitization occurs when receivables are bundled together and sold or transferred to
another organization, which issues securities that are collateralized by the transferred
receivables. The transferor (i.e., the firm that is bundling the portfolio for sale) likely
records a gain on the sale of the securitization when:
a. The risk associated with the bundled portfolio in the aggregate is lower than the risk
of the individual receivables.
b. The lower risk and discount rate results in a lower present value and sales price, resulting in a gain to the transferor.
c. The lower risk and discount rate results in a higher present value and sales price,
resulting in a loss to the transferor.
d. The risk associated with the bundled portfolio in the aggregate is higher than the
risk of the individual receivables.
Explanation / Answer
The Transferor likely records a gain on the sale of the securitization when -- b) The lower risk and discount rate results in a lower present value and sales price, resulting in a gain to the transferor