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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 25: Credit Derivatives Multiple Choice Test Bank: Questions with Answers 1. What is the number of companies underlying the CDX NA IG index? A. 50 B. 75 C. 100 D. 125 Answer: D There are 125 investment grade companies underlying CDX NA IG. 2. What is the number of companies underlying the iTraxx index? A. 50 B. 75 C. 100 D. 125 Answer: D There are 125 investment grade companies underlying iTraxx. 3. What is the rating of the co
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 25: Credit Derivatives Multiple Choice Test Bank: uestions !ith ns!ers 1.What is the number of companies underlying the CDX NA IG indexA.! #.$!C.1 D.1%!Ans&er' D (here are 1%! in)estment grade companies underlying CDX NA IG.%.What is the number of companies underlying the i(raxx indexA.! #.$!C.1 D.1%!Ans&er' D (here are 1%! in)estment grade companies underlying i(raxx.*.What is the rating of the companies underlying the i(raxx indexA.A or abo)e#.### or abo)eC.## or belo&D.### or belo& Ans&er' # (he companies underlying i(raxx must be in)estment grade. (his means that their credit ratings must be ### or abo)e.+.In a CD, &ith a notional principal of -1 million the reference entity defaults. What is the payo to the buyer of protection &hen the reco)ery rate is * / A.-1 million#.-* millionC.-1* millionD.-$ millionAns&er' D (he payo is the notional principal times one minus the reco)ery. In this case this is 1 012 .*3 or -$ million.  !.In a one4year for&ard contract on a CD, that &ill last 5)e years6 &hat usually happens if there is a default during the 5rst year A.(here is a payo to the for&ard protection buyer at the time of default#.(here is a payo to the for&ard protection buyer at the end of one yearC.(here is a payo to the for&ard protection buyer at the end of six yearsD.(he contract ceases to existAns&er' DA for&ard CD, contract ceases to exist if there is a default before the maturity of the for&ard contract.7.Which of the follo&ing happens &hen the default correlation of the companiesunderlying a CD8 increases A.(he )alue of the senior tranche and the e9uity tranche to the protection buyer both increase#.(he )alue of the senior tranche and the e9uity tranche to the protection buyer both decreaseC.(he )alue of the senior tranche to the protection buyer decreases and the )alue of the e9uity tranche to the protection buyer increasesD.(he )alue of the senior tranche to the protection buyer increases and the )alue of the e9uity tranche to the protection buyer decreasesAns&er' D,enior tranches are more li:ely to experience losses and so their )alue to the protection buyer increases. (he e9uity tranche is less li:ely to experience losses and so its )alue to the protection buyer decreases. (hetotal expected loss of all tranches stays the same.3 (his ans&er is best understood by thin:ing about the situation &here e)ery company has a %/ probability of defaulting. What is the situation if the correlation is ;ero What is the situation &hen the correlation is perfect.$.Which of the follo&ing is true of a synthetic CD8A.It is created from portfolios of bonds#.It is created from portfolios of CD,sC.It references a standard portfolio of bondsD.None of the abo)e Ans&er' #A synthetic CD8 is created from a portfolio of CD,s &here protection has been sold on each name.<.A CD, &ith a number of reference entities pro)ides for each reference entity a payo if it defaults. What is a name for this CD,A.#inary CD, #.Add4up #as:et CD,C.=irst4to4Default CD,D.n4to4Default CD,  Ans&er' # (his is a portfolio of CD,s and is :no&n as an add4up bas:et>.Which of the follo&ing is the most popular life for a credit default s&apA.1 year#.* yearsC.! yearsD.1 years Ans&er' C! years is the most popular life for a CD, 1 .If the CD, spread for a regular !4year CD, is 1% basis points6 &hat is the CD, spread for a !4year binary CD, on the same underlying reference entityAssume a reco)ery rate of + /.A.+< basis points#.$% basis pointsC.% basis pointsD.* basis points Ans&er' C (he payo from a regular CD, is 14?3 times the payo from a binary CD,&here ? is the reco)ery rate. It follo&s that the CD, for a binary CD, is 1% @14 .+3 or % basis points 11.=or &hat range of losses is the e9uity tranche of i(raxx or CDX NA IG3 responsible A. to 1 /#. to $/C. to 7/D. to */ Ans&er' D  (he e9uity tranche co)ers losses bet&een and */ of the total principal 1%.Which of the follo&ing is true about a CD,A.?estructuring is ne)er a credit e)ent#.?estructuring is al&ays a credit e)entC.Certain types of restructuring 9ualify as credit e)ents but others do notD.,ometimes a CD, is de5ned so that restructuring is a credit e)ent and sometimes it is not Ans&er' D  ,ometimes restructuring is included as a credit e)ent and sometimes it is not. 1*.If the CD,4bond basis is X minus 6 &hat are X and A.X is the CD, spread and  is the excess of the bond yield o)er the s&ap rate#.X is the excess of the bond yield o)er the s&ap rate and  is the CD, spread C.X is the CD, spread and  is the excess of the bond yield o)er the  (reasury rateD.X is the excess of the bond yield o)er the (reasury rate and  is the CD, spread Ans&er' A  (he CD,4bond basis is the excess of the CD, spread o)er the bond yield spread.1+.In the Behman ban:ruptcy the payo to people &ho had bought CD, protection &as >1.*$!/ of the notional principal. o& &as this determined A.#y calculation of the cheapest4to4deli)er bond#.#y an auction processC.#y a calculation agentD.#y Behmans li9uidators Ans&er' #An auction process is no& used to determine cash payos on CD,s in the e)ent of a default.1!.Which of the follo&ing best describes a total return s&apA.It exchanges the reali;ed return on an asset6 including both income and capital gains@losses6 for a return6 e9ual to BI#8? plus a spread on the initial )alue of the asset #.It exchanges the promised return on an asset6 including both income and capital gains@losses6 for a return e9ual to BI#8? plus a spread on the initial )alue of the asset C.It exchanges the reali;ed return on an asset6 including income but not capital gains@losses6 for a return e9ual to BI#8? plus a spread on the initial )alue of the asset D.It exchanges the promised return on an asset6 including income but notcapital gains@losses6 for a return e9ual to BI#8? plus a spread on the initial )alue of the asset Ans&er' A A total return s&ap exchanges the actual not the promised3 return on an asset for BI#8? plus a spread.17.If a tranche spread is !! basis points and the 5xed coupon is 7 basis points6
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