Question 1

Which of the following describes a subprime mortgage?

Accepted Answer

A)  The rate of interest is less than the prime rate of interest 
B)  The loan-to-value ratio is below average 
C)  The life of the mortgage is less than 25 years 
D)  The credit risk is high 
A)  The rate of interest is less than the prime rate of interest 
B)  The loan-to-value ratio is below average 
C)  The life of the mortgage is less than 25 years 
D)  The credit risk is high D

Question 2

Which of the following were introduced before the credit crisis that started in 2007

Accepted Answer

A)  Basel II 
B)  Dodd-Frank 
C)  Basel III 
D)  Requirements for living wills 
A)  Basel II 
B)  Dodd-Frank 
C)  Basel III 
D)  Requirements for living wills A

Question 3

Which of the following describes the S&P/Case-Shiller index?

Accepted Answer

A)  A stock market index 
B)  An index of interest rates on mortgages 
C)  An index of house prices 
D)  An index showing the dollar amount of mortgages granted each month 
A)  A stock market index 
B)  An index of interest rates on mortgages 
C)  An index of house prices 
D)  An index showing the dollar amount of mortgages granted each month C

Question 4

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 85%,mezzanine 10%,and equity 5%.(The portfolios of subprime mortgages have the same default rates.)An ABS CDO is then created from the mezzanine tranches with the same allocation of principal.How high can losses on the mortgages be before the senior tranche of the ABS CDO bears losses?

Accepted Answer

A)  5.5% 
B)  6.0% 
C)  6.5% 
D)  7.0% 
A)  5.5% 
B)  6.0% 
C)  6.5% 
D)  7.0%

Question 5

Which of the following would be described by the term "liar loan"?

Accepted Answer

A)  A situation where the lender concealed information from the borrower 
B)  A situation where the lender lied to the borrower about the interest rate 
C)  A situation where the borrower lied about the his or her income 
D)  None of the above 
A)  A situation where the lender concealed information from the borrower 
B)  A situation where the lender lied to the borrower about the interest rate 
C)  A situation where the borrower lied about the his or her income 
D)  None of the above

Question 6

Which of the following describes regulatory arbitrage?

Accepted Answer

A)  Finding a way of reducing capital requirements without changing the risks being taken 
B)  Buying products that are not subject to regulation 
C)  Shorting products that are not subject to regulation 
D)  Trading with the government 
A)  Finding a way of reducing capital requirements without changing the risks being taken 
B)  Buying products that are not subject to regulation 
C)  Shorting products that are not subject to regulation 
D)  Trading with the government

Question 7

What are teaser rates

Accepted Answer

A)  Interest rates that appear lower than they are 
B)  Interest rates that depend on LIBOR 
C)  Interest rates on mortgages with a very long amortization period 
D)  Interest rates that apply only for the first two or three years 
A)  Interest rates that appear lower than they are 
B)  Interest rates that depend on LIBOR 
C)  Interest rates on mortgages with a very long amortization period 
D)  Interest rates that apply only for the first two or three years

Question 8

Which of the following describes the waterfall typically used for mortgages pre-crisis?

Accepted Answer

A)  A distribution of cash flows to tranches with priority given to tranche with the highest rating 
B)  A distribution of cash flows to tranches in proportion to their outstanding principals 
C)  A distribution of losses to tranches so that tranches bear losses in proportion to their outstanding principals 
D)  None of the above 
A)  A distribution of cash flows to tranches with priority given to tranche with the highest rating 
B)  A distribution of cash flows to tranches in proportion to their outstanding principals 
C)  A distribution of losses to tranches so that tranches bear losses in proportion to their outstanding principals 
D)  None of the above

Question 9

In 2008 the TED spread reached a high of

Accepted Answer

A)  About 150 basis points 
B)  About 250 basis points 
C)  About 450 basis points 
D)  About 550 basis points 
A)  About 150 basis points 
B)  About 250 basis points 
C)  About 450 basis points 
D)  About 550 basis points

Question 10

Which of the following is NOT true

Accepted Answer

A)  The bonus structure at banks can lead to short-term horizons for decision making 
B)  Securitization involves the transfer of risk 
C)  The term "agency costs" describes the situation where the incentives of two parties in a business relationship are not perfectly aligned 
D)  Correlations decrease in stressed market conditions 
A)  The bonus structure at banks can lead to short-term horizons for decision making 
B)  Securitization involves the transfer of risk 
C)  The term "agency costs" describes the situation where the incentives of two parties in a business relationship are not perfectly aligned 
D)  Correlations decrease in stressed market conditions

Question 11

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.(The portfolios of subprime mortgages have the same default rates.)An ABS CDO is then created from the mezzanine tranches with the same allocation of principal.Losses on the mortgage portfolio prove to be 16%.What,as a percent of tranche principal,are losses on the senior tranche of the ABS CDO

Accepted Answer

A)  50% 
B)  60% 
C)  80% 
D)  100% 
A)  50% 
B)  60% 
C)  80% 
D)  100%

Question 12

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 94.5% (rated AAA),mezzanine 0.1% (rated BBB),and equity 5% (rated C).The portfolios of subprime mortgages have the same default rates.An ABS CDO is then created from the mezzanine tranches.Which of the following is true?

Accepted Answer

A)  The ABS CDO tranches should have ratings ranging from AAA to C 
B)  The ABS CDO tranches should all be rated BBB 
C)  The ABS CDO tranches should all be rated C 
D)  The ABS CDO tranches are almost worthless because the mezzanine tranches are so thin 
A)  The ABS CDO tranches should have ratings ranging from AAA to C 
B)  The ABS CDO tranches should all be rated BBB 
C)  The ABS CDO tranches should all be rated C 
D)  The ABS CDO tranches are almost worthless because the mezzanine tranches are so thin

Question 13

Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?

Accepted Answer

A)  Bear Stearns 
B)  Morgan Stanley 
C)  Lehman Brothers 
D)  Merrill Lynch 
A)  Bear Stearns 
B)  Morgan Stanley 
C)  Lehman Brothers 
D)  Merrill Lynch

Question 14

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 85%,mezzanine 10%,and equity 5%.(The portfolios of subprime mortgages have the same default rates.)An ABS CDO is then created from the mezzanine tranches with the same allocation of principal.How high can losses on the mortgages be before the mezzanine tranche of the ABD CDO bears losses?

Accepted Answer

A)  5.0% 
B)  5.5% 
C)  6.0% 
D)  6.5% 
A)  5.0% 
B)  5.5% 
C)  6.0% 
D)  6.5%

Question 15

AIG lost money because

Accepted Answer

A)  It bought tranches created from mortgages 
B)  It invested heavily in real estate 
C)  It invested heavily in the stock market 
D)  It insured AAA tranches of ABS CDOs 
A)  It bought tranches created from mortgages 
B)  It invested heavily in real estate 
C)  It invested heavily in the stock market 
D)  It insured AAA tranches of ABS CDOs

Question 16

Suppose that an ABS is created from a portfolio of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.Losses on the mortgage portfolio prove to be 16%.What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS

Accepted Answer

A)  50% 
B)  60% 
C)  80% 
D)  100% 
A)  50% 
B)  60% 
C)  80% 
D)  100%

Question 17

Which of the following is true of a non-recourse mortgage?

Accepted Answer

A)  The house buyer, if unable to make payments, can lose all his or her possessions 
B)  The house buyer has an American-style put option on the house 
C)  The house buyer has a European-style put option on the house 
D)  The lender is less likely to lose money on the mortgage 
A)  The house buyer, if unable to make payments, can lose all his or her possessions 
B)  The house buyer has an American-style put option on the house 
C)  The house buyer has a European-style put option on the house 
D)  The lender is less likely to lose money on the mortgage

Question 18

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.(The portfolios of subprime mortgages have the same default rates.)An ABS CDO is then created from the mezzanine tranches of the ABSs with the same allocation of principal.Losses on the mortgage portfolio prove to be 16%.What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS CDO

Accepted Answer

A)  50% 
B)  60% 
C)  80% 
D)  100% 
A)  50% 
B)  60% 
C)  80% 
D)  100%

Question 19

Which of the following tends to lead to an increase in house prices?

Accepted Answer

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

Question 20

Which of the following is true as the correlation between mortgage defaults increases?

Accepted Answer

A)  Equity tranches are almost certain to incur losses 
B)  Senior tranches become more likely to incur losses 
C)  The expected number of defaults increases 
D)  Equity tranches are unaffected 
A)  Equity tranches are almost certain to incur losses 
B)  Senior tranches become more likely to incur losses 
C)  The expected number of defaults increases 
D)  Equity tranches are unaffected

Which of the following describes a subprime mortgage?

Which of the following were introduced before the credit crisis that started in 2007

Which of the following describes the S&P/Case-Shiller index?

Which of the following would be described by the term "liar loan"?

Which of the following describes regulatory arbitrage?

What are teaser rates

Which of the following describes the waterfall typically used for mortgages pre-crisis?

In 2008 the TED spread reached a high of

Which of the following is NOT true

Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?

AIG lost money because

Which of the following is true of a non-recourse mortgage?

Which of the following tends to lead to an increase in house prices?

Which of the following is true as the correlation between mortgage defaults increases?

Introduction

Futures Markets and Central Counterparties

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Xvas

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Itos Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options and Blacks Model

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk and Expected Shortfall

Estimating Volatilities and Correlations

Credit Risk

Credit Derivatives

Exotic Options

Filters

Exam 8: Securitization and the Credit Crisis of 2007

Which of the following describes a subprime mortgage?

Which of the following were introduced before the credit crisis that started in 2007

Which of the following describes the S&P/Case-Shiller index?

Which of the following would be described by the term "liar loan"?

Which of the following describes regulatory arbitrage?

What are teaser rates

Which of the following describes the waterfall typically used for mortgages pre-crisis?

In 2008 the TED spread reached a high of

Which of the following is NOT true

Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?

AIG lost money because

Which of the following is true of a non-recourse mortgage?

Which of the following tends to lead to an increase in house prices?

Which of the following is true as the correlation between mortgage defaults increases?

Introduction

Futures Markets and Central Counterparties

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Xvas

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Itos Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options and Blacks Model

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk and Expected Shortfall

Estimating Volatilities and Correlations

Credit Risk

Credit Derivatives

Exotic Options

Filters