Chapter 9 Flashcards
Securitization’s disadvantages
Lack of transparency and the pricing of the securitization
Dollar-demoninated default rate
Worst case scenario
Moody’s non investment grade
Baa3 others BBB-
Hedge ratio
MVp/MVf x MDp/MDf
Total return swap’s advantage
Customizable and allow tracking error
Longest FRA forward rate agreements
2 years, 6 to 12 months for the majority
And no margin
Securitization disadvantages
Lack of transparency and pricing of securities
Junk bond issuers
Original issuers and fallen angels
4 aspects of Moody’s for credit rating
Fundamentals, covenants, franchise, management quality
When junk bond improve
A callable feature
CDO collateral debt obligation
Collection of assets sells in tranche to pool of investors, use a SPV
CMO collateral mortgage obligation
Like CDO except it packages mortgages
ABS is like
Short-term investment like a TBill but with a small higher yield
Factoring company
Provides a loan against a company’s account recevable
Annual discount yield percentage (banker acceptance)
100-futures price
OverCollateralization
Principal amount of the ABS is less than the collateral
The first defense against losses
Establishing a reserve from the excess spread
TRS total return swap advantage
Customizable
Expanding the universe of investment assets
Improve the efficient frontier
CDS credit default swap
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
CDO collateral debt obligations
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
Original issuers vs fallen angels
Non investment grade, potential highly leveraged, start up cie, experiencing financial difficulty
Fallen angels, once considered investment grade but downgraded to non investment grade
Letter of credit is a
Unfunded committment, promise
A deferred coupon bonds
No interest is payable for a certain number of years
Cash coupon begin until maturity
Cash coupon rate higher
