Missed Questions Flashcards
What is the purpose of an SPV?
The issue the asset backed securities to investors
In a securitization, the collateral is initially sold by the:
Depositor (the company)
Time Tranching
Process in which a set of bond classes or tranches is created that allow investors a choice in the type of prepayment risk, extension or contraction, that they prefer to bear
Credit Tranching
This structure allows investors to choose the amount of credit risk that they prefer to bear
Typical feature of a non-agency residential mortgage-backed security?
Senior/subordinated structure
What is an advantage of a CMO?
Securities are created to meet the asset/liability requirements of institutional investors
For CMO’s, the longest term tranche will have the lowest extension or contraction risk/?
Lower contraction risk
What feature most likely improves the credit rating of a CMBS
Subordination
What is a critical feature that differentiates RMBS and CMBS?
CMBS has call protection for investors which protects them from prepayment risk
Formula to calculate average modified duration of a portfolio of bonds
(ModDur x weight 1) + (ModDur x weight 2) + (ModDur x weight n)
What is the purpose of futures price limits?
Helps the clearinghouse manage its credit exposure
What do forwards and futures contracts have in common?
Nearly equivalent profits by expiration
Which derivative has payoffs that are non-linearly related to the payoffs of the underlying?
Options
An increase in volatility will increase what for call options
The call options time value
Expected future cash flows from derivatives are discounted at what kind of rate?
Interbank rate (libor)
Lower leverage rations indicate what?
Lower leverage and thus lower credit risk (look at debt/capital and debt/ebitda ratios)
Two main factors that affect market liquidity risk
- Size of the issuer
2. Credit quality (The less debt outstanding, the higher the market liquidity risk)
Which derivative allows an investor to pay the return on a stock index and receive a fixed rate?
Equity swap (aka index swap)
The primary commodity derivatives are?
Futures
Compared with the underlying spot market, derivative markets are more likely to have?
Greater liquidity and lower transaction costs
What does net cost of carry mean in derivatives?
This refers to benefits minus costs
When interest rates are constant, futures prices are most likely _____ to forward contracts? (Equal, less, or greater)
Equal
Which industry characteristic is most likely to have a negative impact on a company’s ability to service its outstanding debt?
Low barriers to entry
Prepayment rates depend on three things
- Weighted average coupon of the pool of mortgages
- Prior prepayments of principal
- Current interest rates
