返回列表 发帖
 

7、Suppose a risky bond has a yield of 20%. If the return on U.S. Treasuries is 5% and the default swap premium on the bonds is 19%, what will the arbitrageur’s position be?

A) Go long the Treasury, sell the default swap, and short the risky bond.

B) Go long the Treasury, buy the default swap, and short the risky bond.

C) Short the Treasury, buy the default swap, and invest in the risky bond.

D) Short the Treasury, sell the default swap, and invest in the risky bond.

TOP

 

The correct answer is A

Recall the formula: risk-free bond return + default swap premium = risky bond return. An inequality tells the arbitrageur which position to take. Here it is 5% + 19% > 20%. So the arbitrageur needs to go long the left side (invest in the Treasury and earn the 19% swap premium by taking credit exposure), while shorting the right side (shorting the risky bond). The profit would be 4%. Note that interest rate and liquidity risk remain.


TOP

 

AIM 2: Explain the structure of a typical cash collateralized debt obligation, including the use of a special purpose vehicle.

1、Which of the following statements regarding collateralized debt obligations (CDOs) is FALSE?

A) Interest rate swaps are rarely used due to scrutiny from rating agencies.

B) The senior tranche is usually paid a floating rate.

C) The underlying assets are junk bonds, emerging market debt, bank loans, MBS, and ABS. 

D) Mezzanine tranches receive a fixed rate.

TOP

 

The correct answer is A

The collateral usually has a mix of floating and fixed rate debt so interest rate swaps are used to manage the risk from cash flow mismatches. Interest rate swaps are often used by asset managers to control the interest rate risk imposed by this mismatch, Rating agencies usually mandate the use of swaps. In CDOs there is usually a senior tranche that receives a floating rate, mezzanine tranches that receive a fixed rate, and a subordinate or equity tranche that provides prepayment and credit protection to the other tranches. The underlying assets are junk bonds, emerging market debt, bank loans, mortgage-backed securities (MBS), and asset-backed securities (ABS).


TOP

 

2、Which of the following is FALSE regarding SPVs? They:

A) are legally separate from their parent.

B) use balance-sheet CDOs to avoid alienating clients.

C) use active management to earn high returns in CDOs.

D) have high credit risk due to CDO issuance.

TOP

 

5、A fixed-income investor would purchase credit-linked notes in order to:

A) lower the credit risk of a position.

B) obtain a higher correlation.

C) obtain a higher coupon.

D) lower the principal risk of the portfolio.

TOP

 

The correct answer is C

Credit-linked notes have an imbedded credit option. Investors of credit-linked notes assume a greater amount of credit risk in exchange for a higher coupon.


TOP

 

6、Which of the following best explains the motivation for investors to purchase a credit-linked note?

A) The investor assumes higher credit risk.

B) The investor is guaranteed the principal.

C) The investor receives a higher coupon.

D) The investor assumes lower credit risk.

TOP

 

The correct answer is C

Although the investor does assume higher credit risk, the reason for purchasing a credit-linked note is generally to obtain the higher coupon payment.


TOP

 

3、Which of the following is least likely a relevant risk for the buyer of a credit-linked note (CLN)?

A) Yield curve risk.

B) Credit risk of the bond.

C) Counterparty risk of the CLN issuer.

D) Correlation risk.

TOP

返回列表