Midterm 2

Question 1

Credit Spread

Answer 1

the difference between the interest rate on loans to households and businesses and the ineterst rate on completely safe assets that are sure to be paid off, such as Canada bonds

Question 2

Structured Credit Products

Answer 2

securities that are derivedf rom the cash flows ofunderlying assets and are tailored to have particular risk characteristics that ppeal to investors with different preferences

Question 3

Collateralized Debt Obligation (CDO)

Answer 3

the creation of a collateralized debt obligation (CDO) involves a corporate entity called a special purpose vehicle (SPV), which buys a collection of assets and separates the payment streams from these assets into buckets called tranches. Investors can accept tranches with higher interest that also have the highest risk of defaulting. The downside of the innovation is that the increased complexity can actually reduce the amount of information in financial markets.