5. Which of the following statements about credit card securitization is
correct?
A. Additional fee income is generated for the issuer.
B. The credit card receivables are kept on the issuer’s balance sheet.
C. The cost of default risk from credit card debt to the issuer increases.
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Here the issuer is financial institution or the SPE and how is it receiving additional fee as the ans is A
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The correct answer is A. Credit card securitization generates additional
fee income for the issuer. B is incorrect because the credit card receivables
are removed from the issuer’s balance sheet, which provides both capital
efficiency and reduces the cost of funding. C is incorrect because the cost of
default risk from credit card debt is reduced.
In the context of credit card securitization:
When we talk about additional fee income being generated for the issuer (as mentioned in option A), it typically refers to the fact that the issuer receives payment for the credit card receivables that are bundled and sold to investors through the process of securitization. The issuer may charge fees for creating, managing, and servicing the securitization structure. These fees contribute to additional income for the issuer.
So, in this context:
A. Additional fee income is generated for the issuer. – This means that the financial institution or the issuer receives fees for creating and managing the securitization, and it’s correct in the context of credit card securitization.