Question 1

Which of the following is not true? choose one)

Accepted Answer

A)  The bonus structure at banks is liable to lead to short term horizons for decision making. 
B)  A portfolio of BBB tranches created from mortgages has a loss probability distribution similar to a portfolio of BBB bonds. 
C)  The term 'agency costs' describes the situation where the incentives of two parties in a business relationship are not perfectly aligned. 
D)  Correlations tend to increase in stressed market conditions. 
A)  The bonus structure at banks is liable to lead to short term horizons for decision making. 
B)  A portfolio of BBB tranches created from mortgages has a loss probability distribution similar to a portfolio of BBB bonds. 
C)  The term 'agency costs' describes the situation where the incentives of two parties in a business relationship are not perfectly aligned. 
D)  Correlations tend to increase in stressed market conditions. B

Question 2

When a mortgage is non-recourse: choose one)

Accepted Answer

A)  The house buyer can lose all possessions if they are unable to make payments 
B)  The purchaser has a free American-style put option on the house 
C)  The purchaser has a free European-style put option on the house 
D)  The lender is less likely to lose money on the mortgage 
A)  The house buyer can lose all possessions if they are unable to make payments 
B)  The purchaser has a free American-style put option on the house 
C)  The purchaser has a free European-style put option on the house 
D)  The lender is less likely to lose money on the mortgage B

Question 3

Which of the following would tend to lead to an increase in house prices? choose two)

Accepted Answer

A)  A reduction in interest rates 
B)  Regulators specify a maximum level for the loan-to-value ratio on mortgages 
C)  Banks reduce the minimum FICO that borrowers are required to have 
D)  An increase in foreclosures 
A)  A reduction in interest rates 
B)  Regulators specify a maximum level for the loan-to-value ratio on mortgages 
C)  Banks reduce the minimum FICO that borrowers are required to have 
D)  An increase in foreclosures A,C

Question 4

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 75%, mezzanine 20% and equity 5%. An ABS CDO is then created from the mezzanine tranche with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What as a per cent of tranche principal) are the losses on:
i) The equity tranche of the ABS? _ _ _ _ _ _
ii) The mezzanine tranche of the ABS? _ _ _ _ _ _
iii) The senior tranche of the ABS? _ _ _ _ _ _
iv) The equity tranche of the ABS CDO? _ _ _ _ _ _
v) The mezzanine tranche of the ABS CDO? _ _ _ _ _ _
vi) The senior tranche of the ABS CDO? _ _ _ _ _ _

Accepted Answer

i): 100% 
ii): 55%

Question 5

What are the factors that contributed to the credit crisis in 2007? _ _ _ _ _ _ _ _ _ _ _ _ _ _

Accepted Answer

low interest rate, lax lending standards

Which of the following is not true? choose one)

When a mortgage is non-recourse: choose one)

Which of the following would tend to lead to an increase in house prices? choose two)

What are the factors that contributed to the credit crisis in 2007? _ _ _ _ _ _ _ _ _ _ _ _ _ _

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters

Exam 8: Securitization and the Credit Crisis of 2007

Which of the following is not true? choose one)

When a mortgage is non-recourse: choose one)

Which of the following would tend to lead to an increase in house prices? choose two)

What are the factors that contributed to the credit crisis in 2007? _ _ _ _ _ _ _ _ _ _ _ _ _ _

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters