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

The reference obligation ________.

Two recent credit risk transfer vehicles are credit derivatives and collateralized debt obligations (CDOs).

Credit derivatives are used by institutional portfolio managers to more efficiently control the credit risk of a portfolio rather than the balance sheet of a financial institution.

A credit-linked debenture (CLD) ________.

The International Swap and Derivatives Association (ISDA) has facilitated the growth of the credit derivative market by introducing a tailor-made contract that can be used in credit derivative trades.

CDOs are categorized based on the motivation of the sponsor of the transaction: arbitrage transactions and balance sheet transactions.

A credit default swap is a trivial type of credit derivative.

The motivation in an arbitrage transaction is to earn an attractive spread for the debt tranche.

In January 2003, the ISDA published its revised credit events definitions in the 2003 ISDA Credit Derivative Definitions. In regards to these definitions, which of the below statements is FALSE?

A ________ 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.

In a credit default swap index, the credit risk of a standardized basket of reference entities is transferred between the protection buyer and protection seller with the contract continuing even if there is a credit event for any of the reference entities in the basket but at a lower premium to reflect the credit protection for less reference entities.

In a ________, the protection buyer pays a fee to the protection seller in return for the right to receive a payment conditional upon the occurrence of a credit event by the reference obligation or the reference entity.

In a synthetic CDO, payments to the tranches issued are generated from the collateral's coupon interest and principal from maturing or prepaid debt obligations.

Basically what an SFOC seeks to do is ________.

The payment by the credit protection seller if a credit event occurs may ________.

The reference entity ________.

With the development of any market vehicle, there is the concern that market participants will understand the associated risks.

A structured finance operating company (SFOC) 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.

Credit derivatives can be used to create credit risk transfer products. The two most common products employing credit default swaps are ________.

The concerns with credit derivatives and, therefore, synthetic CDOs being used as CRT vehicles include ________.