Question 1

In regards to a credit-linked note (CLN), which of the below statements is FALSE?

Accepted Answer

A)  In contrast to a standard bond, the maturity value does not depend on the performance of the reference issuer. 
B)  If a credit event occurs with respect to the reference issuer, then (1) the bond is paid off, and (2) the maturity value is adjusted down. 
C)  The compensation for the investor accepting the credit risk of the reference issuer is an enhanced coupon payment. 
D)  Typically, CLNs have a maturity of anywhere from three months to several years, with one to three years being the most likely term of credit exposure. 
A)  In contrast to a standard bond, the maturity value does not depend on the performance of the reference issuer. 
B)  If a credit event occurs with respect to the reference issuer, then (1) the bond is paid off, and (2) the maturity value is adjusted down. 
C)  The compensation for the investor accepting the credit risk of the reference issuer is an enhanced coupon payment. 
D)  Typically, CLNs have a maturity of anywhere from three months to several years, with one to three years being the most likely term of credit exposure. A

Question 2

The long maturity of CLNs reflects the desire of investors to take a credit view for such a time period.

Accepted Answer

A) True 
 B)False  False

Question 3

Unlike a single-name credit default swap, the preferred settlement term for a basket default swap is cash settlement. Describe this cash settlement in terms of the termination value.

Accepted Answer

With cash settlement, the termination value is equal to the difference between the nominal amount of the reference obligation for which a credit event has occurred and its market value at the time of the credit event. The termination value is then the amount of the payment made by the protection seller to the protection buyer. No bonds are delivered by the protection buyer to the protection seller. The documentation for the basket default swap will set forth how the market value at the time of the credit event is determined.

Question 4

Like a CDO, the manager of an SFOC can increase or decrease its leverage based on its expectation about factors that impact the return on its portfolio.

Accepted Answer

A) True 
 B)False

Question 5

CDOs are categorized based on the motivation of the sponsor of the transaction. If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as ________.

Accepted Answer

A)  a collateral transaction. 
B)  an arbitrage transaction. 
C)  a motivational transaction. 
D)  All of these 
A)  a collateral transaction. 
B)  an arbitrage transaction. 
C)  a motivational transaction. 
D)  All of these

Question 6

What is the most controversial credit event that may be included in a credit derivative product? When does this controversial credit event occur?

Accepted Answer

The most controversial credit event that

Question 7

The 1999 ISDA Credit Derivatives Definitions (referred to as the "1999 Definitions") provides a list of eight credit events: Which of the below includes three of these eight credit events?

Accepted Answer

A)  bankruptcy, credit event upon merger, and cross deceleration. 
B)  cross hedge, downgrade, and failure to pay. 
C)  repudiation / moratorium, restructuring, and cross default. 
D)  repudiation / natatorium, bankruptcy, and failure to pay. 
A)  bankruptcy, credit event upon merger, and cross deceleration. 
B)  cross hedge, downgrade, and failure to pay. 
C)  repudiation / moratorium, restructuring, and cross default. 
D)  repudiation / natatorium, bankruptcy, and failure to pay.

Question 8

What is credit-linked note (CLN)? Can it be complicated?

Accepted Answer

A credit-linked note (CLN) is a security

Question 9

Describe a structured finance operating company (SFOC). Does an SFOC seek a true arbitrage?

Accepted Answer

A structured finance operating company (

Question 10

The proceeds to meet the obligations to the CDO tranches (interest and principal repayment) can come from coupon interest payments from the ________.

Accepted Answer

A)  coupon interest payments from the collateral assets. 
B)  maturing of collateral assets 
C)  sale of collateral assets 
D)  All of these 
A)  coupon interest payments from the collateral assets. 
B)  maturing of collateral assets 
C)  sale of collateral assets 
D)  All of these

Question 11

Studies have identified regulatory and supervisory concerns with CRT vehicles, such as credit derivatives and CDOs. From these studies, four general issues were identified including ________.

Accepted Answer

A)  clean risk transfer. 
B)  risk of success of market participants to understand associated risk. 
C)  potentially low concentration of risk. 
D)  favorable selection. 
A)  clean risk transfer. 
B)  risk of success of market participants to understand associated risk. 
C)  potentially low concentration of risk. 
D)  favorable selection.

Question 12

In a basket credit default swap, there are multiple reference entities with the trigger determining when the protection buyer must make a payment to the protection seller being based on the number of reference entities that must default.

Accepted Answer

A) True 
 B)False

Question 13

________ is defined as a variety of acts that are associated with bankruptcy or insolvency laws.

Accepted Answer

A)  Bankruptcy 
B)  Merging for a credit event 
C)  Downgrading 
D)  Restructuring 
A)  Bankruptcy 
B)  Merging for a credit event 
C)  Downgrading 
D)  Restructuring

Question 14

The ISDA documentation for a credit derivative trade identifies the reference entity and what constitutes a credit event that sets forth when a payout must be made by the protection seller to the protection buyer.

Accepted Answer

A) True 
 B)False

Question 15

In regards to a structured finance operating company (SFOC), which of the below statements is FALSE?

Accepted Answer

A)  An SFOC sounds much like an arbitrage CDO since both use borrowed funds to generate a return from investing in a pool of credit-risky assets. 
B)  There is only one type of SFOC. 
C)  Unlike a CDO, the manager of an SFOC can increase or decrease its leverage based on its expectation about factors that impact the return on its portfolio. 
D)  The most popular type of SFOC is the structured investment vehicle (SIV). 
A)  An SFOC sounds much like an arbitrage CDO since both use borrowed funds to generate a return from investing in a pool of credit-risky assets. 
B)  There is only one type of SFOC. 
C)  Unlike a CDO, the manager of an SFOC can increase or decrease its leverage based on its expectation about factors that impact the return on its portfolio. 
D)  The most popular type of SFOC is the structured investment vehicle (SIV).

Question 16

________ is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.

Accepted Answer

A)  A structured finance operating company (SFO
C)  
B)  An equity-linked note (ELN) 
C)  A credit-linked debenture (CL
D)  
D)  A credit-linked note (CLN) 
A)  A structured finance operating company (SFO
C)  
B)  An equity-linked note (ELN) 
C)  A credit-linked debenture (CL
D)  
D)  A credit-linked note (CLN)

Question 17

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds), a CDO is referred to as a ________. When the underlying pool of debt obligations is bank loans, a CDO is referred to as a ________.

Accepted Answer

A)  collateralized loan obligation (CLO); collateralized bond obligation (CBO) 
B)  collateralized bond security (CBS); collateralized loan obligation (CLO) 
C)  collateralized bond obligation (CBO); collateralized loan security (CLS) 
D)  collateralized bond obligation (CBO); collateralized loan obligation (CLO) 
A)  collateralized loan obligation (CLO); collateralized bond obligation (CBO) 
B)  collateralized bond security (CBS); collateralized loan obligation (CLO) 
C)  collateralized bond obligation (CBO); collateralized loan security (CLS) 
D)  collateralized bond obligation (CBO); collateralized loan obligation (CLO)

Question 18

Which of the below statements is FALSE?

Accepted Answer

A)  The reason why restructuring is so trouble-free is that a protection buyer benefits from the inclusion of restructuring as a credit event and feels that eliminating restructuring as a credit event will erode its credit protection. 
B)  If the reference obligation is a loan and the protection buyer is the lender, a benefit is that the protection buyer receives a payment from the protection seller. 
C)  If the reference obligation is a loan and the protection buyer is the lender, a benefit is that the accommodating restructuring fosters a relationship between the lender and its customer. 
D)  As the credit derivatives market developed, market participants learned a great deal about how to better define credit events. 
A)  The reason why restructuring is so trouble-free is that a protection buyer benefits from the inclusion of restructuring as a credit event and feels that eliminating restructuring as a credit event will erode its credit protection. 
B)  If the reference obligation is a loan and the protection buyer is the lender, a benefit is that the protection buyer receives a payment from the protection seller. 
C)  If the reference obligation is a loan and the protection buyer is the lender, a benefit is that the accommodating restructuring fosters a relationship between the lender and its customer. 
D)  As the credit derivatives market developed, market participants learned a great deal about how to better define credit events.

Question 19

Arbitrage transactions can be divided into two types depending on the primary source of the proceeds from the collateral to satisfy the obligation to the tranches. Describe these two types.

Accepted Answer

If the primary source is the interest an

Question 20

Credit derivatives, particularly ________, allow the transfer of credit risk to another party without the sale of the loan.

Accepted Answer

A)  special purpose vehicles 
B)  special purpose swap 
C)  credit default swaps 
D)  credit default vehicles 
A)  special purpose vehicles 
B)  special purpose swap 
C)  credit default swaps 
D)  credit default vehicles

Exam 31: Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

In regards to a credit-linked note (CLN), which of the below statements is FALSE?

The long maturity of CLNs reflects the desire of investors to take a credit view for such a time period.

Unlike a single-name credit default swap, the preferred settlement term for a basket default swap is cash settlement. Describe this cash settlement in terms of the termination value.

Like a CDO, the manager of an SFOC can increase or decrease its leverage based on its expectation about factors that impact the return on its portfolio.

CDOs are categorized based on the motivation of the sponsor of the transaction. If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as ________.

What is the most controversial credit event that may be included in a credit derivative product? When does this controversial credit event occur?

The 1999 ISDA Credit Derivatives Definitions (referred to as the "1999 Definitions") provides a list of eight credit events: Which of the below includes three of these eight credit events?

What is credit-linked note (CLN)? Can it be complicated?

Describe a structured finance operating company (SFOC). Does an SFOC seek a true arbitrage?

The proceeds to meet the obligations to the CDO tranches (interest and principal repayment) can come from coupon interest payments from the ________.

Studies have identified regulatory and supervisory concerns with CRT vehicles, such as credit derivatives and CDOs. From these studies, four general issues were identified including ________.

In a basket credit default swap, there are multiple reference entities with the trigger determining when the protection buyer must make a payment to the protection seller being based on the number of reference entities that must default.

________ is defined as a variety of acts that are associated with bankruptcy or insolvency laws.

The ISDA documentation for a credit derivative trade identifies the reference entity and what constitutes a credit event that sets forth when a payout must be made by the protection seller to the protection buyer.

In regards to a structured finance operating company (SFOC), which of the below statements is FALSE?

________ is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds), a CDO is referred to as a ________. When the underlying pool of debt obligations is bank loans, a CDO is referred to as a ________.

Which of the below statements is FALSE?

Arbitrage transactions can be divided into two types depending on the primary source of the proceeds from the collateral to satisfy the obligation to the tranches. Describe these two types.

Credit derivatives, particularly ________, allow the transfer of credit risk to another party without the sale of the loan.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

The Market for Foreign Exchange and Risk Control Instruments

Filters

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds), a CDO is referred to as a . When the underlying pool of debt obligations is bank loans, a CDO is referred to as a .