Chapter 9

Question 1

Securitization’s disadvantages

Answer 1

Lack of transparency and the pricing of the securitization

Question 2

Dollar-demoninated default rate

Answer 2

Worst case scenario

Question 3

Moody’s non investment grade

Answer 3

Baa3 others BBB-

Question 4

Hedge ratio

Answer 4

MVp/MVf x MDp/MDf

Question 5

Total return swap’s advantage

Answer 5

Customizable and allow tracking error

Question 6

Longest FRA forward rate agreements

Answer 6

2 years, 6 to 12 months for the majority
And no margin

Question 7

Securitization disadvantages

Answer 7

Lack of transparency and pricing of securities

Question 8

Junk bond issuers

Answer 8

Original issuers and fallen angels

Question 9

4 aspects of Moody’s for credit rating

Answer 9

Fundamentals, covenants, franchise, management quality

Question 10

When junk bond improve

Answer 10

A callable feature

Question 11

CDO collateral debt obligation

Answer 11

Collection of assets sells in tranche to pool of investors, use a SPV

Question 12

CMO collateral mortgage obligation

Answer 12

Like CDO except it packages mortgages

Question 13

ABS is like

Answer 13

Short-term investment like a TBill but with a small higher yield

Question 14

Factoring company

Answer 14

Provides a loan against a company’s account recevable

Question 15

Annual discount yield percentage (banker acceptance)

Answer 15

100-futures price

Question 16

OverCollateralization

Answer 16

Principal amount of the ABS is less than the collateral

Question 17

The first defense against losses

Answer 17

Establishing a reserve from the excess spread

Question 18

TRS total return swap advantage

Answer 18

Customizable

Question 19

Expanding the universe of investment assets

Answer 19

Improve the efficient frontier

Question 20

CDS credit default swap

Answer 20

Exchange of 2 cash flows, a fee payment and a conditional payment, 2 parties protection buyer and protection sellers, may or may not involve a reference asset, a SPV or tranches

Question 21

CDO collateral debt obligations

Answer 21

Packages a collection of assets (other than mortgage) and sells in tranches of pool to investors, each tranch a different level of credit, use a spv to hold the assets

Question 22

Original issuers vs fallen angels

Answer 22

Non investment grade, potential highly leveraged, start up cie, experiencing financial difficulty
Fallen angels, once considered investment grade but downgraded to non investment grade

Question 23

Letter of credit is a

Answer 23

Unfunded committment, promise

Question 24

A deferred coupon bonds

Answer 24

No interest is payable for a certain number of years
Cash coupon begin until maturity
Cash coupon rate higher

Question 25

Over the counter contracts for hedging interest rates

Answer 25

Forward rate agreement (FRA)

Question 26

Contracts used by banks , corp and individiuals to hedge interest rate risk for future payments

Answer 26

Interest rate futures

Question 27

10 years GovCanada bond futures are settled ?

Answer 27

Physical bond

Question 28

If interest rate increase

Answer 28

Short gov Canada bond futures

Question 29

Overcollateralization

Answer 29

Internal credit enhancement

Question 30

ETF enters a total return swap

Answer 30

Synthetic replication