Missed Questions

Question 1

What is the purpose of an SPV?

Answer 1

The issue the asset backed securities to investors

Question 2

In a securitization, the collateral is initially sold by the:

Answer 2

Depositor (the company)

Question 3

Time Tranching

Answer 3

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

Question 4

Credit Tranching

Answer 4

This structure allows investors to choose the amount of credit risk that they prefer to bear

Question 5

Typical feature of a non-agency residential mortgage-backed security?

Answer 5

Senior/subordinated structure

Question 6

What is an advantage of a CMO?

Answer 6

Securities are created to meet the asset/liability requirements of institutional investors

Question 7

For CMO’s, the longest term tranche will have the lowest extension or contraction risk/?

Answer 7

Lower contraction risk

Question 8

What feature most likely improves the credit rating of a CMBS

Answer 8

Subordination

Question 9

What is a critical feature that differentiates RMBS and CMBS?

Answer 9

CMBS has call protection for investors which protects them from prepayment risk

Question 10

Formula to calculate average modified duration of a portfolio of bonds

Answer 10

(ModDur x weight 1) + (ModDur x weight 2) + (ModDur x weight n)

Question 11

What is the purpose of futures price limits?

Answer 11

Helps the clearinghouse manage its credit exposure

Question 12

What do forwards and futures contracts have in common?

Answer 12

Nearly equivalent profits by expiration

Question 13

Which derivative has payoffs that are non-linearly related to the payoffs of the underlying?

Answer 13

Options

Question 14

An increase in volatility will increase what for call options

Answer 14

The call options time value

Question 15

Expected future cash flows from derivatives are discounted at what kind of rate?

Answer 15

Interbank rate (libor)

Question 16

Lower leverage rations indicate what?

Answer 16

Lower leverage and thus lower credit risk (look at debt/capital and debt/ebitda ratios)

Question 17

Two main factors that affect market liquidity risk

Answer 17

1. Size of the issuer

2. Credit quality (The less debt outstanding, the higher the market liquidity risk)

Question 18

Which derivative allows an investor to pay the return on a stock index and receive a fixed rate?

Answer 18

Equity swap (aka index swap)

Question 19

The primary commodity derivatives are?

Answer 19

Futures

Question 20

Compared with the underlying spot market, derivative markets are more likely to have?

Answer 20

Greater liquidity and lower transaction costs

Question 21

What does net cost of carry mean in derivatives?

Answer 21

This refers to benefits minus costs

Question 22

When interest rates are constant, futures prices are most likely _____ to forward contracts? (Equal, less, or greater)

Answer 22

Equal

Question 23

Which industry characteristic is most likely to have a negative impact on a company’s ability to service its outstanding debt?

Answer 23

Low barriers to entry

Question 24

Prepayment rates depend on three things

Answer 24

1. Weighted average coupon of the pool of mortgages
2. Prior prepayments of principal
3. Current interest rates