Topic 5

Question 1

A mortgage-backed security (MBS) is most similar to a

A. Stock
B. Bond
C. Demand deposit
D. Insurance contract

Answer 1

B. Bond

Question 2

In general, when the correlations between assets in a tranched security increase, the senior tranches _____ in value while the junior tranches ______ in value.

A. Increase; increase
B. Decrease; decrease
C. Increase; decrease
D. Decrease; increase

Answer 2

D. Decrease; increase

Question 3

The buyer of a credit default swap (CDS)

A. Makes payments to the seller if the underlying security defaults
B. Makes payments similar to insurance premiums to the seller
C. Receives payments similar to insurance premiums from the seller
D. Is basically selling insurance to the seller of the CDS

Answer 3

B. Makes payments similar to insurance premiums to the seller

Question 4

A collateralized debt obligation (CDO) is similar to a

A. CDS
B. MBS
C. SIV
D. Synthetic bond
E. GSE

Answer 4

B. MBS

Question 5

The “originate to distribute” hypothesis is an example of

A. Adverse selection
B. Moral hazard
C. Liquidity risk
D. Interest rate risk

Answer 5

B. Moral hazard

Question 6

Quantitative Easing (QE) led to

A. Large changes in the amount of assets on the Fed’s balance sheet
B. Small changes in the amount of liabilities on the Fed’s balance sheet
C. Only changed the composition of assets on the Fed’s balance sheet, not the amount
D. Only changed the composition of liabilities on the Fed’s balance sheet, not the amount
E. None of the above

Answer 6

A. Large changes in the amount of assets on the Fed’s balance sheet

Question 7

“Too Big to Fail” is an example of 
A. Adverse Selection
B. Moral Hazard
C. A Principal-agent problem
D. Bank regulations

Answer 7

B. Moral Hazard