aianjie

 

19、In a total return swap, the:

A) total return payer bears the risk of holding the reference asset.

B) total return payer transfers the risk of holding the reference asset to the total return receiver.

C) total return receiver transfers the risk of holding the reference asset to the total return payer. 

D) credit risk of the buyer and seller cancel each other out.

aianjie

 

The correct answer is B

In a total return swap, the total return payer transfers the capital gains and losses of the reference asset to the total return receiver.

aianjie

 

20、The total return payer in a total return swap (TRS) must pay the total return buyer:

A) the total bond return minus the coupon payments.

B) the total bond return.

C) only the coupon payments and any principal received from the bond.

D) a floating rate payment usually based on the London Interbank Offered Rate (LIBOR). 

aianjie

 

The correct answer is B

The credit risk seller pays to the credit risk buyer the total return of the underlying bond which is equal to the coupon payments plus price appreciation or minus price depreciation.

aianjie

 

21、The total return payer (credit risk seller) in a total return swap (TRS) is exposed to:

A) the interest-rate risk of the debt obligation.

B) paying floating rate payments.

C) the credit risk of the issuer of the debt obligation.

D) the credit risk of the credit risk buyer. 

aianjie

 

The correct answer is D

The seller of credit risk in a TRS is exposed to the credit risk of the buyer. If the value of the underlying obligation depreciates, the credit risk buyer must compensate the credit risk seller. The amount of depreciation could be substantial—as in the case of default—and the credit risk buyer may not have the resources to pay the credit risk seller. The seller often requires the buyer to pledge collateral to support this potential payment.

aianjie

 

22、Credit risk in a swap can be reduced by:

I.           requiring a margin.

II.         netting payments between parties.

III.        full two-way payment covenant.

IV.      limited two-way payment covenant.

A) I and IV only.

B) I, II, and III only.

C) II and III only.

D) II and IV only.

aianjie

 

The correct answer is B

A limited two-way payment covenant abolishes obligations if either party is in default.

aianjie

 

23、Which of the following is least likely a characteristic of credit default swaps? Credit default swaps:

A) are similar to a credit put option.

B) transfer credit risk exposure.

C) trade on an exchange.

D) Payoff if a credit event occurs.

aianjie

 

The correct answer is C

Credit default swaps can be compared to a credit put option or an insurance contract. Credit default swaps are not traded on an exchange; rather they are traded over the counter.