Deck 12: Asset Backed Securities, Interest Rate Agreements, and Currency Swaps

Question 1

A trust created to specifically buy credit card receivables in $1 million bundles is a

A) receivable trust.
B) special purpose trust.
C) credit enhancer.
D) tranche.

Answer 1

special purpose trust.

Question 2

The trust structure for managing receivable pools is employed for two reasons:
I. The originator of the receivables maintains control of the receivables.
II. The trust and the originator of the loan are exempt from taxes.
III. Even if the originator goes into bankruptcy, the receivables will not be affected.
IV. The originator is required to pay when the borrower default and does not pay the receivable.

A) I and II above.
B) I and III above.
C) II and III above.
D) III land IV above

Answer 2

II and III above.

Question 3

To enhance the credit worthiness of an asset-backed security, the issuer may do the following except

A) divide the pool into different risk class.
B) establish an outside account to meet any underpayment of borrowers.
C) set aside cash reserves for future non payment.
D) All of the above.

Answer 3

All of the above.

Question 4

A bank is able to enhance its source of funding through securitization because

A) they may be more aggressive in pursuing loans, expanding source of funding.
B) they may become more attractive to depositors and thus attract more depositors.
C) a buyer of asset-backed security is providing funds to the bank who may not have any deposit in the posit in the bank
D) will increase loans to less qualified borrowers because they can be sold later.

Question 5

Changes needed to occur in legal, _______________and __________before mortgages and financial assets can be successfully securitized.

A) technological, institutional
B) financial, accounting rules
C) mortgage market, institutional
D) financial system, technological

Question 6

The largest share of specialty lending asset-backed security is

A) commercial loans.
B) credit card loans.
C) home equity loans.
D) auto finance.

Question 7

Securitization is a form of

A) indirect finance.
B) direct finance.
C) a loan.
D) a mortgage.

Question 8

____________________involves two parties that trade interest payment streams to match their cash inflows with cash outflows.

A) Securitization
B) A security swap
C) An interest-rate swap
D) A currency swap

Question 9

To reduce the possibility of loss in an interest rate swap, the parties involved in the swap can

A) trade the interest rate payments but not the principal payments.
B) to fund the fixed rate assets with variable-rate liability interest payments.
C) to fund the variable rate assets with fixed-rate liability interest payments.
D) to match the maturity of the assets and liabilities.

Question 10

A bank that has long-term mortgages funded with short-tern floating rate deposits, all other factors remaining constant, will experience ___________when interest rates go down.

A) an increase in interest income
B) a decrease in interest income
C) no change in interest income
D) an increase in capital gain

Question 11

All the following are alternative ways of hedging against interest rate risk except

A) securitization
B) interest-rate swaps
C) capital swaps, floors, and ceilings
D) interest rate caps, floors, and collars

Question 12

A(n) __________ gives the holder the right but not the obligation to buy or sell an asset in the future at the strike price determined today.

A) future
B) option
C) interest rate collar
D) swap

Question 13

In an interest rate cap agreement, the seller of the cap compensates the cap buyer when an interest rate index is to a specified strike price.

A) equal
B) below
C) higher
D) All of the above.

Question 14

A bank with a positive income gap can reduce interest rate risk when the interest rate goes down without limiting the bank's ability to profit from higher interest rate by purchasing

A) currency swap
B) interest rate collar
C) interest rate cap
D) interest rate floor.

Question 15

_____________is an agreement whereby the seller of the floor, for a fee, to pay the buyer when the actual interest rate falls below the strike rate.

A) A currency swap
B) An interest rate collar
C) An interest rate cap
D) An interest rate floor

Question 16

The simultaneous buying of an interest rate cap and selling of an interest rate floor is called a(n)

A) interest rate collar.
B) interest rate cap.
C) interest rate floor.
D) currency swap.

Question 17

A(n)_____________ is an agreement whereby one party agrees to trade periodic payments over a specified period of time, in a given currency, with another party who agrees to do the same in a different currency.

A) interest rate swap
B) interest rate floor
C) currency swap
D) interest rate cap

Question 18

Benefits of currency swaps include

A) creating profitable opportunities for intermediation and reduced borrowing cost.
B) circumventing foreign exchange regulations.
C) hedging against foreign exchange rate risk.
D) All of the above.

Question 19

A U.S company with an investment in a country with currency controls can engaged in a currency swap to avoid lost interest on earnings by

A) borrowing in the foreign currency and exchanging the interest with another company that has a dollar denominated interest payment
B) swapping the principal of a foreign currency loan with a local currency loan.
C) closing the investment.
D) buying an option to buy foreign currency using dollars.

Question 20

All the following can be used to help institutions to manage foreign exchange risk except

A) interest rate caps.
B) currency swaps.
C)options.
D) futures.

Question 21

A financial institution would be willing to sell an interest rate cap when

A) they believe that the interest rate in the future will go up and that they will not make any payment.
B) they believe that the interest rate in the future will be stable and they will not make any payments.
C) they believe that the interest rate received on the cap fee will be smaller and they will make no payment.
D) None of the above.

Question 22

The seller of an interest rate floor expects

A) lower interest rates.
B) stable interest rates.
C) higher interest rates.
D) Both B and C are correct.

Question 23

The ______ is usually used as the reference rate in interest cap agreement.

A) fed funds rate
B) discount rate
C) inflation rate
D) LIBOR

Question 24

Financial contracts whose values are "derives" from the values of other underlying instruments, such as foreign exchange, bonds, equities, or an index are

A) discounts.
B) LIBORs.
C) derivatives.
D) asset-Backed mortgages.

Question 25

Banks pursued securitizations

A) as a means for increasing funding for mortgages..
B) because of high and volatile interest rates.
C) because of changes in tax laws and the growth of government-sponsored enterprises..
D) All of the above are correct.

Question 26

Which of the following is false regarding interest rate swaps?

A) If interest rates fall, one party would be better off without the swap agreement.
B) If interest rates rise, one party would be better off without the swap agreement.
C) If interest rates stay the same, both parties are no better or no worse off.
D) If interest rates stay the same, one party would be better off without the swap agreement

Question 27

An agreement whereby the seller for a fee compensates the buyer when an interest rate index exceeds a specified strike price is called.

A) an interest rate cap.
B) an interest rate floor
C) an interest rate collar.
D) an arbitrage.

Question 28

An agreement whereby the seller for a fee compensates the buyer when an interest rate index is less than a specified strike price is called.

A) an interest rate cap.
B) an interest rate floor
C) an interest rate collar.
D) an arbitrage.

Question 29

The main benefit of currency swap agreements over currency futures contracts is

A) swap agreements are at a lower interest rate.
B) swap agreements are for a shorter time period.
C) swap agreements are for a longer time period.
D) that there is no default risk with swap agreements.

Question 30

An interest rate collar is

A) when one simultaneously buys an interest rate cap and sells an interest rate floor.
B) when one simultaneously buys an interest rate floor and sells an interest rate cap.
C) the difference between the actual interest rate and the strike rate.
D) Both A and B are correct.

Question 31

Banks pursue securitizations

A) as a means for increasing funding for mortgages.
B) because of low interest rates that increase bank profits.
C) because of the collapse of Fannie Mae and Freddie Mac.
D) All of the above are correct.

Question 32

Which of the following is true regarding interest rate swaps?

A) Interest rate swaps have disappeared because the financial crisis of 2008.
B) Interest rate swaps allow borrowers to switch from fixed to variable rate loans.
C) If interest rates stay the same, both parties are no better or no worse off.
D) If interest rates stay the same, one party would be better off without the swap agreement

Question 33

An agreement whereby the buyer for a fee compensates the seller when an interest rate index exceeds a specified strike price is called.

A) an interest rate cap.
B) an interest rate floor
C) an interest rate collar.
D) None of the above is correct.

Question 34

An agreement to simultaneously buy and interest rate cap and sell an interest rate floor is

A) an interest rate cap.
B) an interest rate floor
C) an interest rate collar.
D) an arbitrage.

Question 35

Which of the following is false?

A) A typical securitization involves borrowers, a loan originator, a special- purpose trust, a rating agency, a credit enhancer, an underwriter, and financial investors.
B) Through the pooling of financial obligations, prudent credit enhancement, favorable credit ratings, and appropriate structuring, a securitization has the potential to significantly reduce transactions costs associated with moving funds from lenders to borrowers.
C) Under favorable conditions, securitizations can result in borrowers paying lower borrowing costs, issuers earning higher profits, and investors receiving lower yields.
D) The real estate bubble from 2002 to 2007showed that securitization can lead to inappropriate extension of credit to overleveraged borrowers, an increase in defaults, and a dramatic decline in the value of some asset- backed securities.

Question 36

Which of the following is true?

A) The high and volatile interest rates of the 1970s and 1980s encouraged large banks to pursue securitization as a means of increasing funding for traditional home mortgages.
B) Changes in tax laws, the creation of government- sponsored enterprises (GSEs), and technological innovation facilitated this process.
C) Securitization spread to many other types of asset-backed issues including home equity loans, auto finance, credit cards, commercial loans, student loans, and manufactured housing.
D) Although it held out the promise of efficiency gains to be shared by all market participants, securitization is currently viewed by many as having contributed to the current financial crisis.
E) All of the above are true.

Question 37

The investigative process used by lenders, investors, or investment bankers to ensure that a borrower's or security issuer's financial statements are accurate is

A) credit enhancement.
B) a special purpose trust.
C) due diligence.
D) a tranche.

Question 38

Which of the following financial instruments have not been securitized?

A) mortgages
B) automobile loans
C) accounts receivables
D) small business loans
E) All of the above have been securitized.

Question 39

Which of the following is true?

A) In recent years, the amount of new issues of mortgage-backed securities has declined more than the amount of new issues of asset-backed securities.
B) In recent years, the drop in asset backed securities has been greater than the drop in mortgage backed securities.
C) In recent years, mortgage-backed securities have dropped while other asset-backed securities have increased.
D) None of the above is true.

Question 40

Which of the following is true?

A) Interest rate caps, floors, and collars can be used to manage interest rate risk.
B) Securitization, interest rate swaps, or balance sheet restructuring can be used to manage interest rate risk.
C) An interest rate cap is an agreement whereby the buyer of the cap agrees, for a fee, to compensate the cap seller when an interest rate index exceeds a specified strike rate.
D) Both A and B are correct.

Question 41

Which of the following is false?

A) An interest rate floor is an agreement whereby the seller of the floor agrees, for a fee, to pay the buyer of the floor when the actual interest rate falls below the strike rate.
B) With either an interest rate floor, the amount of compensation is determined by the difference between the actual interest rate and the strike rate multiplied by the principal amount of the transaction.
C) With an interest rate cap, the amount of compensation is determined by the difference between the actual interest rate and the strike rate multiplied by the principal amount of the transaction.
D) An interest rate collar is created when one simultaneously sells an interest rate cap and buys an interest rate floor.

Question 42

Which of the following is false?

A) Currency swaps are used to reduce a firm's exposure to foreign exchange risk.
B) The main benefit of currency swaps over currency future contracts is that swaps can be done for multiple- year periods whereas future contracts are used to hedge foreign exchange risk for shorter periods of time.
C) The volume of interest rate agreements and currency swaps has decreased dramatically, due to the global financial crisis.
D) Securitization began in response to a shortage of funds for mortgages in the 1970s and 1980s.