Question 1

Which of the below statements is FALSE?

Accepted Answer

A)  For credit risk transferred out of the banking system, there is the concern with the extent to which credit risk is being transferred to nonbanks, such as monoline or multiline insurance companies and hedge funds. 
B)  Within the insurance industry, the largest seller of credit protection is financial guarantors, insuring the senior tranches in synthetic CDO deals. 
C)  The ability of originators to transfer credit risk via credit derivatives, CDOs, or securitization has raised concerns that a lending culture based on origination volume rather than prudent lending practices may be inadvertently adopted by banks. 
D)  None of these 
A)  For credit risk transferred out of the banking system, there is the concern with the extent to which credit risk is being transferred to nonbanks, such as monoline or multiline insurance companies and hedge funds. 
B)  Within the insurance industry, the largest seller of credit protection is financial guarantors, insuring the senior tranches in synthetic CDO deals. 
C)  The ability of originators to transfer credit risk via credit derivatives, CDOs, or securitization has raised concerns that a lending culture based on origination volume rather than prudent lending practices may be inadvertently adopted by banks. 
D)  None of these

Question 2

The most controversial credit event that may be included in a credit derivative product is restructuring of an obligation. A restructuring occurs when the terms of the obligation are altered so as to make the new terms less attractive to the debt holder than the original terms. Term that can be changed are a ________.

Accepted Answer

A)  reduction in the interest rate and a reduction in the principal. 
B)  rescheduling of the principal repayment schedule and a reduction in the principal. 
C)  change in the level of seniority of the obligation in the reference entity's debt structure and a reduction in the interest rate. 
D)  All of these 
A)  reduction in the interest rate and a reduction in the principal. 
B)  rescheduling of the principal repayment schedule and a reduction in the principal. 
C)  change in the level of seniority of the obligation in the reference entity's debt structure and a reduction in the interest rate. 
D)  All of these

Question 3

The ________ developed a standardized contract that could be used by parties to trades of a credit derivatives contract.

Accepted Answer

A)  International Swap and Derivatives Association (ISD
A)  
B)  Domestic Derivatives and Futures Association (DDF
A)  
C)  International Credit Swap Association (ICS
A)  
D)  International Swap and Futures Association (ISF
A)  
A)  International Swap and Derivatives Association (ISD
A)  
B)  Domestic Derivatives and Futures Association (DDF
A)  
C)  International Credit Swap Association (ICS
A)  
D)  International Swap and Futures Association (ISF
A)

Question 4

Credit default swaps ________.

Accepted Answer

A)  are used to shift credit exposure to a credit protection seller. 
B)  have a secondary purpose to hedge the credit exposure to a particular asset or issuer. 
C)  have one reference obligation called a single-name credit default swap. 
D)  are referred to as a basket credit default swap when there is a single reference entity. 
A)  are used to shift credit exposure to a credit protection seller. 
B)  have a secondary purpose to hedge the credit exposure to a particular asset or issuer. 
C)  have one reference obligation called a single-name credit default swap. 
D)  are referred to as a basket credit default swap when there is a single reference entity.

Question 5

The motivation in a balance sheet transaction is to transfer loans on a financial institution's balance sheet and obtain capital relief.

Accepted Answer

A) True 
 B)False

Question 6

Credit derivative products have ________ that is contingent upon a ________ occurring.

Accepted Answer

A)  a payback; credit effect 
B)  a payout; credit event 
C)  an expense; debit outcome 
D)  a fee; credit result 
A)  a payback; credit effect 
B)  a payout; credit event 
C)  an expense; debit outcome 
D)  a fee; credit result

Question 7

A ________ can result in either the transfer of the credit risk from one bank to another or from a bank to a nonbank entity.

Accepted Answer

A)  cart vehicle 
B)  bank vehicle 
C)  bank entity 
D)  CRT vehicle 
A)  cart vehicle 
B)  bank vehicle 
C)  bank entity 
D)  CRT vehicle

Question 8

What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.

Accepted Answer

A CRT vehicle can result in either the t

Question 9

Credit derivatives are used by institutional portfolio managers in the normal course of activities to more efficiently ________.

Accepted Answer

A)  control the market risk of a portfolio. 
B)  control the balance sheet of a financial institution. 
C)  transact than by avoiding the cash market. 
D)  deleverage an exposure in the credit market. 
A)  control the market risk of a portfolio. 
B)  control the balance sheet of a financial institution. 
C)  transact than by avoiding the cash market. 
D)  deleverage an exposure in the credit market.

Question 10

________ is a term used by Moody's to refer to an entity whose business activities and operations as well as its credit rating are based on detailed, predetermined parameters.

Accepted Answer

A)  A structured finance operating company (SFO
C)  
B)  A structured finance cooperative (SF
C)  
C)  An organized finance operating company (OFO
C)  
D)  An organized finance cooperative (OF
C)  
A)  A structured finance operating company (SFO
C)  
B)  A structured finance cooperative (SF
C)  
C)  An organized finance operating company (OFO
C)  
D)  An organized finance cooperative (OF
C)

Question 11

A synthetic CDO absorbs the ________, but not the ________, of the reference obligations.

Accepted Answer

A)  positive risk; promised ownership 
B)  market risk; legal ownership 
C)  credit risk; legal ownership 
D)  default risk; book ownership 
A)  positive risk; promised ownership 
B)  market risk; legal ownership 
C)  credit risk; legal ownership 
D)  default risk; book ownership

Question 12

Which of the below statements is FALSE?

Accepted Answer

A)  The standard single-name credit default swap when the reference entity is a corporate bond or a sovereign bond is fixed based on a notional amount. 
B)  If no credit event has occurred by the maturity of the swap, both sides renegotiate the swap agreement so that further obligations are incurred. 
C)  A credit default swap can specify at the contract date the exact amount of payment that will be made by the protection seller should a credit event occur. 
D)  A standard credit default swap specifies quarterly payments. 
A)  The standard single-name credit default swap when the reference entity is a corporate bond or a sovereign bond is fixed based on a notional amount. 
B)  If no credit event has occurred by the maturity of the swap, both sides renegotiate the swap agreement so that further obligations are incurred. 
C)  A credit default swap can specify at the contract date the exact amount of payment that will be made by the protection seller should a credit event occur. 
D)  A standard credit default swap specifies quarterly payments.

Question 13

Which of the below statements is FALSE?

Accepted Answer

A)  In the absence of a credit event, the protection buyer will make a quarterly swap premium payment over the life of the swap. 
B)  If a credit event occurs, there are no further payments of the swap premium by the protection buyer to the protection seller. 
C)  If a credit event occurs, a termination value is determined for the swap. 
D)  With physical settlement the protection seller delivers a specified amount of the face value of bonds of the reference entity to the protection buyer. 
A)  In the absence of a credit event, the protection buyer will make a quarterly swap premium payment over the life of the swap. 
B)  If a credit event occurs, there are no further payments of the swap premium by the protection buyer to the protection seller. 
C)  If a credit event occurs, a termination value is determined for the swap. 
D)  With physical settlement the protection seller delivers a specified amount of the face value of bonds of the reference entity to the protection buyer.

Question 14

In regards to a CDO structure, which of the below statements is TRUE?

Accepted Answer

A)  In a CDO structure, there is a collateral manager responsible for managing the portfolio of debt obligations. 
B)  The portfolio of debt obligations in which the collateral manager invests is referred to as the portfolio. 
C)  The individual issues held that comprise the collateral are referred to as the collateral liabilities. 
D)  These debt obligations are referred to as tranches or bond classes. The tranches include: junior tranches, mezzanine tranches, and equity tranche 
A)  In a CDO structure, there is a collateral manager responsible for managing the portfolio of debt obligations. 
B)  The portfolio of debt obligations in which the collateral manager invests is referred to as the portfolio. 
C)  The individual issues held that comprise the collateral are referred to as the collateral liabilities. 
D)  These debt obligations are referred to as tranches or bond classes. The tranches include: junior tranches, mezzanine tranches, and equity tranche

Question 15

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more types of debt obligations that include ________.

Accepted Answer

A)  U.S. domestic investment-grade and high-yield corporate bonds and U.S. domestic bank loans. 
B)  emerging market bonds and special situation loans and distressed debt. 
C)  foreign bank loans and asset-backed securities. 
D)  All of these 
A)  U.S. domestic investment-grade and high-yield corporate bonds and U.S. domestic bank loans. 
B)  emerging market bonds and special situation loans and distressed debt. 
C)  foreign bank loans and asset-backed securities. 
D)  All of these

Question 16

Which of the below statements is TRUE?

Accepted Answer

A)  In a credit default swap index, the credit risk of a standardized basket of reference entities is not transferred between the protection buyer and protection seller. 
B)  The mechanics of a credit default swap index are entirely different from that of a single-name credit default swap. 
C)  The parties to a credit default swap are the credit protection buyer and the credit protection seller, the latter providing protection should a credit event occur for a reference entity or pool of reference entities during the life of the contract and the former making periodic payments for the protection. 
D)  There are only two types of credit default swaps: single-name credit default swap and credit default swap indexes. 
A)  In a credit default swap index, the credit risk of a standardized basket of reference entities is not transferred between the protection buyer and protection seller. 
B)  The mechanics of a credit default swap index are entirely different from that of a single-name credit default swap. 
C)  The parties to a credit default swap are the credit protection buyer and the credit protection seller, the latter providing protection should a credit event occur for a reference entity or pool of reference entities during the life of the contract and the former making periodic payments for the protection. 
D)  There are only two types of credit default swaps: single-name credit default swap and credit default swap indexes.

Question 17

In the case of a financial institution that seeks to make a market in the new CRT vehicles, there is a concern that in selling more complex products, such as synthetic CDOs, they may not be properly hedging their position and therefore ________.

Accepted Answer

A)  maintaining the institution's risk. 
B)  decreasing the institution's risk. 
C)  increasing the institution's risk. 
D)  All of these 
A)  maintaining the institution's risk. 
B)  decreasing the institution's risk. 
C)  increasing the institution's risk. 
D)  All of these

Question 18

With a single-name credit default swap, there is only one reference entity and once a credit event occurs, the protection seller must compensate the protection buyer (either physical or cash settlement); payment by the protection buyer to the protection seller end either when a credit event occurs or the maturity date of the contract is reached.

Accepted Answer

A) True 
 B)False

Question 19

A credit-linked note (CLN) is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.

Accepted Answer

A) True 
 B)False

Question 20

Which of the below statements is FALSE?

Accepted Answer

A)  If a payout is triggered only after two reference obligations default, the swap is referred to as a first-to-default basket swap. 
B)  Single-name credit default swaps can be used in the swap market by portfolio managers to leverage their position in a corporate bond. 
C)  From the list of deliverable obligations, the protection buyer will select for delivery to the protection seller the cheapest-to-deliver issue. 
D)  Since all reference entities that are the subject of credit default swaps have many issues outstanding, there will be a number of alternative issues of the reference entity that the protection buyer can deliver to the protection seller. These issues are known as deliverable obligations. 
A)  If a payout is triggered only after two reference obligations default, the swap is referred to as a first-to-default basket swap. 
B)  Single-name credit default swaps can be used in the swap market by portfolio managers to leverage their position in a corporate bond. 
C)  From the list of deliverable obligations, the protection buyer will select for delivery to the protection seller the cheapest-to-deliver issue. 
D)  Since all reference entities that are the subject of credit default swaps have many issues outstanding, there will be a number of alternative issues of the reference entity that the protection buyer can deliver to the protection seller. These issues are known as deliverable obligations.

Exam 31: Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

Which of the below statements is FALSE?

The ________ developed a standardized contract that could be used by parties to trades of a credit derivatives contract.

Credit default swaps ________.

The motivation in a balance sheet transaction is to transfer loans on a financial institution's balance sheet and obtain capital relief.

Credit derivative products have ________ that is contingent upon a ________ occurring.

A ________ can result in either the transfer of the credit risk from one bank to another or from a bank to a nonbank entity.

What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.

Credit derivatives are used by institutional portfolio managers in the normal course of activities to more efficiently ________.

________ is a term used by Moody's to refer to an entity whose business activities and operations as well as its credit rating are based on detailed, predetermined parameters.

A synthetic CDO absorbs the ________, but not the ________, of the reference obligations.

Which of the below statements is FALSE?

Which of the below statements is FALSE?

In regards to a CDO structure, which of the below statements is TRUE?

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more types of debt obligations that include ________.

Which of the below statements is TRUE?

In the case of a financial institution that seeks to make a market in the new CRT vehicles, there is a concern that in selling more complex products, such as synthetic CDOs, they may not be properly hedging their position and therefore ________.

A credit-linked note (CLN) is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.

Which of the below statements is FALSE?

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

The Market for Foreign Exchange and Risk Control Instruments

Filters

Credit derivative products have that is contingent upon a occurring.

A synthetic CDO absorbs the , but not the , of the reference obligations.