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26. A portfolio manager enters into a total rate of return swap as the total return receiver. Under which of the following situations would the portfolio manager be required to make a net outlay to the counterparty?
A. If the transaction was initiated as a hedge, then no outlay was required.
B. There was a capital gain on the reference asset.
C. The market value of the reference asset decreased significantly.
D. The spread between the reference asset and the benchmark asset changed.
Correct answer is C
A is incorrect. The hedge may not perform as expected. For example, the credit spread may narrow but if the yields are rising, then the total return receiver may still be required to make a net payment. ffice ffice" />
B is incorrect. A capital gain means that the total return reciever will receive a payment.
C is correct. When the market value of the reference asset decreased, that means a capital loss, hence the total return receiver will be required to pay the net difference. In other words, the total return receiver is exposed to both credit risk and market risk.
D is incorrect. There is a reference asset in the total rate of return swap, but not an additional benchmark asset.
27. Which of the following reduce a credit exposure by shortening the effective maturity of a position?
I. Liquidity put
II. Credit trigger.
A. Both I and II
B. I but not II
C. II but not I
D. Neither of I or II
Correct answer is A
Liquidity puts give the parties the right to settle and terminate trades on pre-specified future dates. Credit triggers specify that trades must be settled if the credit rating of a party falls below pre-specified levels.
Hence the correct combination is both of the above i.e. option A
28. What is the survival rate at the end of three years, if the annual default probabilities are 8 percent, 12 percent and 15 percent in the first, second and third years, respectively?
A. 68.8%
B. 39.1%
C. 99.9%
D. 65.0%
Correct answer is A
A is correct: Survival Rate (SR) = 1 ? Marginal Mortality Rate = 1 ? Default Probability
For multi-period, SR = (1 ? d1) X (1 ? d2) X (1 ? d3)
= (1 ? 8%) X (1 ? 12%) X (1 ? 15%)
= 68.8%
B is incorrect.
C is incorrect
D is incorrect
Reference: John B. Caouette, Edward I. Altman, and Paul Narayanan, Managing Credit Risk 2nd ed. Chapter 15.
29. In a securitized transaction, over-collateralization results when
A. The originator puts aside some cash in a reserve account to absorb credit losses.
B. A securitization transaction carves up the cash flows generated from the asset pool into various pieces.
C. The interest payments and other fees received on the assets in the pool exceed the interest payment made on the ABS plus the fee paid to service the assets along with miscellaneous expenses.
D. The value of the assets in the pool exceeds the amount of Asset Backed Security (ABS) involved.
Correct answer is D
A. Stands for cash reserve account
B. Definition for subordinated tranching
C. Mentions about excess spread
D. Is correct defines over collateralization
30. A department store chain has a B1 rating from Moody's and a B+ rating from S& . Its balance sheet reflects a large number of receivables from
shoppers who use the chain's private label credit card. The firm has decided to raise much needed funds for renovation via securitization of these receivables. Which of the following scenarios is the most likely outcome?
A. The bond issued in the securitization will be B1/B+ rated because the department store chain is so rated.
B. The asset-backed security (ABS) will be have a senior tranche that is rated investment-grade and whose face value is lower than the value of the receivables that were on the firm's balance sheet.
C. The asset-backed security (ABS) will be overcollateralized with the receivables that had been on the firm's balance sheet and are now a liability of the special purpose entity (SPE).
D. The securitization will result in a bond with two tranches; one which is senior and receives a Ba3/BB- rating, and another which is junior and receives a B2/B-.
Correct answer is B
A is incorrect because ABS bonds are rated with respect to the risk of the underlying assets (in this credit card receivables) not the risk of the originator of the assets.
B is the correct answer. A large fraction of ABSs are structured with senior and sub tranches. The senior is usually AAA because it has the full backing of all the assets in the pool that the SPE owns, while the sub tranche only gets paid back ifr the senior tranche is paid in full. To ensure that the default risk is lower, the senior tranche is smaller than the pool of receivables backing the bond.
C is incorrect because if overcollateralization is used the collateral is an asset of the SPE not a liability
D is incorrect because it is usually the case that at least one of the tranches is investment-grade. | 
发表于 2009-6-13 14:14
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