Question 1

The reference obligation ________.

Accepted Answer

A)  is the issuer of the debt instrument and hence is also referred to as the reference issuer. 
B)  could be a corporation or a sovereign government. 
C)  is the particular debt issue for which the credit protection is being sought. 
D)  could be Ford Motor Credit Company.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

A credit-linked debenture (CLD) ________.

Accepted Answer

A)  is a credit derivative, typically a credit default swap. 
B)  cannot be complicated. 
C)  is the credit protection seller; the investor in the CLN is the credit protection buyer 
D)  is unlike a standard bond.

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

A)  A minor change involved restructuring. 
B)  One of these definitions involved no restructuring. 
C)  One of these definitions did not involve full or old restructuring. 
D)  The major change was to repudiation.

Question 10

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.

Accepted Answer

A)  cross default 
B)  restructuring 
C)  downgrading 
D)  repudiation

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A)  credit event swap 
B)  credit protection swap 
C)  protection default swap 
D)  credit default swap

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

Basically what an SFOC seeks to do is ________.

Accepted Answer

A)  generate "arbitrage" returns by lending funds. 
B)  invest borrowed funds in such a way to earn less than the cost of the funds. 
C)  invest borrowed funds in credit-safe debt. 
D)  generate "arbitrage" returns by borrowing funds.

Question 15

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

Accepted Answer

A)  not be a predetermined fixed amount. 
B)  be determined by the decline in value of the reference entity. 
C)  be determined by the increase in value of the reference obligation. 
D)  be determined by the decline in value of the reference obligation.

Question 16

The reference entity ________.

Accepted Answer

A)  is the issuer of the debt instrument and hence is also referred to as the reference issuer. 
B)  is the particular debt issue for which the credit protection is being sought. 
C)  could not be Ford Motor Credit Company. 
D)  could be Ford Motor Credit Company bond issue

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  synthetic CDOs and credit-linked notes. 
B)  synthetic CDOs and credit-linked CDOs. 
C)  synthetic notes and credit-linked notes. 
D)  nonsynthetic notes and credit-linked CDOs.

Question 20

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

Accepted Answer

A)  a concern with counterparty risk. 
B)  a concern with legal risks that may arise from a transaction. 
C)  a concern with the failure of the counterparty selling credit protection would result in the buyer of credit protection maintaining the credit exposure that it thought it had eliminated. 
D)  All of these

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 ________, 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 ________.