Question 1

Which of the following is true of a synthetic CDO?

Accepted Answer

A) It is created from portfolios of bonds 
B) It is created from portfolios of CDSs 
C) It references a standard portfolio of bonds 
D) None of the above 
A) It is created from portfolios of bonds 
B) It is created from portfolios of CDSs 
C) It references a standard portfolio of bonds 
D) None of the above B

Question 2

What is the rating of the companies underlying the iTraxx index?

Accepted Answer

A) A or above 
B) BBB or above 
C) BB or below 
D) BBB or below 
A) A or above 
B) BBB or above 
C) BB or below 
D) BBB or below B

Question 3

In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal.How was this determined?

Accepted Answer

A) By calculation of the cheapest-to-deliver bond 
B) By an auction process 
C) By a calculation agent 
D) By Lehman's liquidators 
A) By calculation of the cheapest-to-deliver bond 
B) By an auction process 
C) By a calculation agent 
D) By Lehman's liquidators B

Question 4

The yield on a company's five-year bonds is 5%.The five year swap rate is 4.5% and the five-year Treasury rate is 4%.What would be closest to your best estimate of the five-year CDS spread

Accepted Answer

A) 200 basis points 
B) 150 basis points 
C) 100 basis points 
D) 50 basis points 
A) 200 basis points 
B) 150 basis points 
C) 100 basis points 
D) 50 basis points

Question 5

Which of the following best describes a total return swap?

Accepted Answer

A) It exchanges the realized return on an asset, including both income and capital gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset 
B) It exchanges the promised return on an asset, including both income and capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset 
C) It exchanges the realized return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset 
D) It exchanges the promised return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset 
A) It exchanges the realized return on an asset, including both income and capital gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset 
B) It exchanges the promised return on an asset, including both income and capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset 
C) It exchanges the realized return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset 
D) It exchanges the promised return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset

Question 6

Which of the following is true about a CDS?

Accepted Answer

A) Restructuring is never a credit event 
B) Restructuring is always a credit event 
C) Certain types of restructuring qualify as credit events but others do not 
D) Sometimes a CDS is defined so that restructuring is a credit event and sometimes it is not 
A) Restructuring is never a credit event 
B) Restructuring is always a credit event 
C) Certain types of restructuring qualify as credit events but others do not 
D) Sometimes a CDS is defined so that restructuring is a credit event and sometimes it is not

Question 7

A CDS with a number of reference entities provides for each reference entity a payoff if it defaults.What is a name for this CDS?

Accepted Answer

A) Binary CDS 
B) Add-up Basket CDS 
C) First-to-Default CDS 
D) n-to-Default CDS 
A) Binary CDS 
B) Add-up Basket CDS 
C) First-to-Default CDS 
D) n-to-Default CDS

Question 8

Which of the following is the most popular life for a credit default swap?

Accepted Answer

A) 1 year 
B) 3 years 
C) 5 years 
D) 10 years 
A) 1 year 
B) 3 years 
C) 5 years 
D) 10 years

Question 9

If the CDS-bond basis is X minus Y,what are X and Y?

Accepted Answer

A) X is the CDS spread and Y is the excess of the bond yield over the swap rate 
B) X is the excess of the bond yield over the swap rate and Y is the CDS spread 
C) X is the CDS spread and Y is the excess of the bond yield over the Treasury rate 
D) X is the excess of the bond yield over the Treasury rate and Y is the CDS spread 
A) X is the CDS spread and Y is the excess of the bond yield over the swap rate 
B) X is the excess of the bond yield over the swap rate and Y is the CDS spread 
C) X is the CDS spread and Y is the excess of the bond yield over the Treasury rate 
D) X is the excess of the bond yield over the Treasury rate and Y is the CDS spread

Question 10

In a CDS with a notional principal of $100 million the reference entity defaults.What is the payoff to the buyer of protection when the recovery rate is 30%?

Accepted Answer

A) $100 million 
B) $30 million 
C) $130 million 
D) $70 million 
A) $100 million 
B) $30 million 
C) $130 million 
D) $70 million

Question 11

A portfolio of ten companies is formed.In a third-to-default swap (Circle one)

Accepted Answer

A) There is a payoff when the third default on the portfolio happens 
B) There is a payoff when the first, second and third companies defaults happen 
C) There is a payoff when the third, fourth, fifth…tenth companies defaults happen 
D) None of the above 
A) There is a payoff when the third default on the portfolio happens 
B) There is a payoff when the first, second and third companies defaults happen 
C) There is a payoff when the third, fourth, fifth…tenth companies defaults happen 
D) None of the above

Question 12

For what range of losses is the equity tranche of iTraxx (or CDX NA IG)responsible?

Accepted Answer

A) 0 to 10% 
B) 0 to 7% 
C) 0 to 6% 
D) 0 to 3% 
A) 0 to 10% 
B) 0 to 7% 
C) 0 to 6% 
D) 0 to 3%

Question 13

Gaussian quadrature is

Accepted Answer

A) A quadratic spline approximation to a normal distribution 
B) A way to approximate an integral of a function of a normally distribute variable as a sum of terms 
C) A procedure for speeding up Monte Carlo simulation when credit derivatives are valued 
D) An alternative to a look up table to determining values of the cumulative normal distribution 
A) A quadratic spline approximation to a normal distribution 
B) A way to approximate an integral of a function of a normally distribute variable as a sum of terms 
C) A procedure for speeding up Monte Carlo simulation when credit derivatives are valued 
D) An alternative to a look up table to determining values of the cumulative normal distribution

Question 14

If the CDS spread for a regular 5-year CDS is 120 basis points,what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%.

Accepted Answer

A) 48 basis points 
B) 72 basis points 
C) 200 basis points 
D) 300 basis points 
A) 48 basis points 
B) 72 basis points 
C) 200 basis points 
D) 300 basis points

Question 15

If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?

Accepted Answer

A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year

Question 16

In a one-year forward contract on a CDS that will last five years,what usually happens if there is a default during the first year?

Accepted Answer

A) There is a payoff to the forward protection buyer at the time of default 
B) There is a payoff to the forward protection buyer at the end of one year 
C) There is a payoff to the forward protection buyer at the end of six years 
D) The contract ceases to exist 
A) There is a payoff to the forward protection buyer at the time of default 
B) There is a payoff to the forward protection buyer at the end of one year 
C) There is a payoff to the forward protection buyer at the end of six years 
D) The contract ceases to exist

Question 17

Which of the following happens when the default correlation of the companies underlying a CDO increases?

Accepted Answer

A) The value of the senior tranche and the equity tranche to the protection buyer both increase 
B) The value of the senior tranche and the equity tranche to the protection buyer both decrease 
C) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases 
D) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases 
A) The value of the senior tranche and the equity tranche to the protection buyer both increase 
B) The value of the senior tranche and the equity tranche to the protection buyer both decrease 
C) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases 
D) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases

Question 18

What is the number of companies underlying the iTraxx index?

Accepted Answer

A) 50 
B) 75 
C) 100 
D) 125 
A) 50 
B) 75 
C) 100 
D) 125

Question 19

What is the number of companies underlying the CDX NA IG index?

Accepted Answer

A) 50 
B) 75 
C) 100 
D) 125 
A) 50 
B) 75 
C) 100 
D) 125

Question 20

Which of the following describes "base correlation"

Accepted Answer

A) The most basic correlation measure possible 
B) A correlation used to value all tranches 
C) The correlation implied from market data 
D) The correlation for valuing a tranche with an attachment point of 0% 
A) The most basic correlation measure possible 
B) A correlation used to value all tranches 
C) The correlation implied from market data 
D) The correlation for valuing a tranche with an attachment point of 0%

Exam 25: Credit Derivatives

Which of the following is true of a synthetic CDO?

What is the rating of the companies underlying the iTraxx index?

In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal.How was this determined?

The yield on a company's five-year bonds is 5%.The five year swap rate is 4.5% and the five-year Treasury rate is 4%.What would be closest to your best estimate of the five-year CDS spread

Which of the following best describes a total return swap?

Which of the following is true about a CDS?

A CDS with a number of reference entities provides for each reference entity a payoff if it defaults.What is a name for this CDS?

Which of the following is the most popular life for a credit default swap?

If the CDS-bond basis is X minus Y,what are X and Y?

In a CDS with a notional principal of $100 million the reference entity defaults.What is the payoff to the buyer of protection when the recovery rate is 30%?

A portfolio of ten companies is formed.In a third-to-default swap (Circle one)

For what range of losses is the equity tranche of iTraxx (or CDX NA IG)responsible?

Gaussian quadrature is

If the CDS spread for a regular 5-year CDS is 120 basis points,what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%.

If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?

In a one-year forward contract on a CDS that will last five years,what usually happens if there is a default during the first year?

Which of the following happens when the default correlation of the companies underlying a CDO increases?

What is the number of companies underlying the iTraxx index?

What is the number of companies underlying the CDX NA IG index?

Which of the following describes "base correlation"

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

OIS Discounting, Credit Issues, and Funding Costs

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Ito’s Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk

Estimating Volatilities and Correlations

Credit Risk

Exotic Options

Filters