Question 1

CDOs are categorized based on the motivation of the sponsor of the transaction. If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as ________.

Accepted Answer

If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as an arbitrage transaction. Therefore, option B is the correct choice. Options A and C are not accurate descriptions of CDOs. Option D is incorrect as it includes options A and C, which are wrong.

Question 2

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds), a CDO is referred to as a ________. When the underlying pool of debt obligations is bank loans, a CDO is referred to as a ________.

Accepted Answer

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds), a CDO is referred to as a collateralized bond obligation (CBO). When the underlying pool of debt obligations is bank loans, a CDO is referred to as a collateralized loan obligation (CLO). Therefore, the best choice is D, as it correctly matches the types of CDOs with their underlying pool of debt obligations.

Question 3

In regards to a CDO structure, which of the below statements is TRUE?

Accepted Answer

A CDO structure involves a collateral manager who is responsible for managing the portfolio of debt obligations.

Question 4

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more types of debt obligations that include ________.

Accepted Answer

A collateralized debt obligation (CDO) can be backed by a diverse range of debt obligations, including U.S. domestic investment-grade and high-yield corporate bonds, U.S. domestic bank loans, emerging market bonds, special situation loans, distressed debt, foreign bank loans, and asset-backed securities. Therefore, choice D, "All of these," is the best answer.

Question 5

In regards to a structured finance operating company (SFOC), which of the below statements is FALSE?

Accepted Answer

There are different types of SFOCs, including structured investment vehicles (SIVs), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs). Therefore, statement B is false.

Question 6

Basically what an SFOC seeks to do is ________.

Accepted Answer

An SFOC (Special Financing and Operations Company) aims to generate "arbitrage" returns by borrowing funds at a lower cost and investing them in assets that yield a higher return, thus earning a profit from the difference.

Question 7

Which of the below statements is FALSE?

Accepted Answer

With physical settlement, the protection buyer delivers a specified amount of the face value of bonds of the reference entity to the protection seller, not the other way around as stated in choice D.

Question 8

The proceeds to meet the obligations to the CDO tranches (interest and principal repayment) can come from coupon interest payments from the ________.

Accepted Answer

The proceeds to meet the obligations to the CDO tranches can come from all three sources: coupon interest payments from the collateral assets, maturing of collateral assets, and sale of collateral assets.

Question 9

________ is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.

Accepted Answer

The definition given is that of a credit-linked note (CLN). A structured finance operating company (SFOC) is a type of special purpose vehicle, but it is not directly related to the given concept. An equity-linked note (ELN) is linked to the performance of an underlying equity, not to a reference issuer's credit performance. A credit-linked debenture (CLD) is not a widely used term and is not commonly used to describe this type of security.

Question 10

In regards to a CDO structure, at least an A rating is typically sought for the ________ at least a B rating is sought for the ________.

Accepted Answer

In a CDO structure, the senior tranches are the most senior and have the highest priority to receive payments from the underlying assets. Hence, they are sought to be rated at least A. Mezzanine tranches are next in line and have a lower priority compared to senior tranches. Therefore, a rating of at least B is sought for them. Subordinate/equity tranches are the riskiest and have the lowest priority for payments, hence they have the lowest rating.

Question 11

A synthetic CDO absorbs the ________, but not the ________, of the reference obligations.

Accepted Answer

A synthetic CDO is a type of financial product that transfers the credit risk of a portfolio of reference obligations, such as bonds or loans, to investors. The investors receive periodic payments in exchange for assuming the risk of default of those obligations. Therefore, a synthetic CDO absorbs the credit risk of the reference obligations, but not the legal ownership of them.

Question 12

Cash CDOs went a long way in providing banks with the opportunity to better manage their balance sheet. However, problems with cash CDOs including ________.

Accepted Answer

The answer of Cash CDOs went a long way in...

Question 13

Which of the below statements is TRUE?

Accepted Answer

Option C accurately defines the parties involved in a credit default swap contract. Option A is false as the credit risk of a reference basket is indeed transferred between the protection seller and buyer. Option B is also false as the mechanics of a credit default swap index are very similar to that of a single-name credit default swap. Option D is false as there are other variants of credit default swaps such as bespoke or tranched credit default swaps.

Question 14

A credit-linked debenture (CLD) ________.

Accepted Answer

A credit-linked debenture (CLD) is a credit derivative, typically a credit default swap.

Question 15

Which of the below statements is FALSE?

Accepted Answer

The motivation in a balance sheet transaction is to remove loans from a financial institution's balance sheet and obtain capital relief.

Question 16

In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.

Accepted Answer

Dealers will look to see if there is a potential return available to the equity tranche of a minimum amount before deciding to create a CDO. This ensures that the equity tranche will receive a sufficient return on investment before any of the senior tranches receive payments.

Question 17

Which of the below statements is TRUE?

Accepted Answer

Collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs) are both examples of CDOs. A CDO is a security that is backed by a pool of debt obligations, which can include loans, bonds, or other forms of debt. The collateral manager is responsible for managing the portfolio of debt obligations, and the funds to purchase the assets for a CDO are obtained from the sale of securities, which may include senior tranches, mezzanine tranches, and subordinate/equity tranches. Option A is incorrect because a CDO can be backed by a diversified pool of debt obligations, not necessarily non-diversified. Option B is incorrect because the collateral manager is responsible for managing the portfolio. Option D is incorrect because all tranches of a CDO can be sold to fund the purchase of assets.

Question 18

________ is a term used by Moody's to refer to an entity whose business activities and operations as well as its credit rating are based on detailed, predetermined parameters.

Accepted Answer

Moody's uses the term "Structured Finance Operating Company (SFOC)" to describe an entity whose business activities and credit ratings are based on predetermined parameters. Option B, C, and D combinations are not used by Moody's.

Question 19

Assume a hypothetical credit default swap where the notional amount is $10 million and there are 92 actual days in a quarter. If the swap premium is 400 basis points (0.04), what is the quarterly swap premium payment made by the protection buyer?

Accepted Answer

Quarterly premium payment = (notional amount * premium rate * number of days in quarter) / 365 
= ($10,000,000 * 0.04 * 92) / 365 
= $102,222

Question 20

Which of the below statements is FALSE?

Accepted Answer

A first-to-default basket swap triggers a payout when the first reference obligation defaults, not after two defaults.

Quiz 31: Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

CDOs are categorized based on the motivation of the sponsor of the transaction. If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as ________.

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds) , a CDO is referred to as a . When the underlying pool of debt obligations is bank loans, a CDO is referred to as a .

In regards to a CDO structure, which of the below statements is TRUE?

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more types of debt obligations that include ________.

In regards to a structured finance operating company (SFOC) , which of the below statements is FALSE?

Basically what an SFOC seeks to do is ________.

Which of the below statements is FALSE?

The proceeds to meet the obligations to the CDO tranches (interest and principal repayment) can come from coupon interest payments from the ________.

________ is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle) , which has credit risk to a second issuer (called the reference issuer) , and the return is linked to the credit performance of the reference issuer.

In regards to a CDO structure, at least an A rating is typically sought for the at least a B rating is sought for the .

A synthetic CDO absorbs the , but not the , of the reference obligations.

Cash CDOs went a long way in providing banks with the opportunity to better manage their balance sheet. However, problems with cash CDOs including ________.

Which of the below statements is TRUE?

A credit-linked debenture (CLD) ________.

Which of the below statements is FALSE?

In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.

Which of the below statements is TRUE?

________ is a term used by Moody's to refer to an entity whose business activities and operations as well as its credit rating are based on detailed, predetermined parameters.

Assume a hypothetical credit default swap where the notional amount is $10 million and there are 92 actual days in a quarter. If the swap premium is 400 basis points (0.04) , what is the quarterly swap premium payment made by the protection buyer?

Which of the below statements is FALSE?

Quiz 31: Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

CDOs are categorized based on the motivation of the sponsor of the transaction. If the sponsor's motivation is to earn the spread between the yield offered on the collateral and the payments made to the various tranches in the structure, then the transaction is referred to as ________.

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds) , a CDO is referred to as a ________. When the underlying pool of debt obligations is bank loans, a CDO is referred to as a ________.

In regards to a CDO structure, which of the below statements is TRUE?

A collateralized debt obligation (CDO) is a security backed by a diversified pool of one or more types of debt obligations that include ________.

In regards to a structured finance operating company (SFOC) , which of the below statements is FALSE?

Basically what an SFOC seeks to do is ________.

Which of the below statements is FALSE?

The proceeds to meet the obligations to the CDO tranches (interest and principal repayment) can come from coupon interest payments from the ________.

________ is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle) , which has credit risk to a second issuer (called the reference issuer) , and the return is linked to the credit performance of the reference issuer.

In regards to a CDO structure, at least an A rating is typically sought for the ________ at least a B rating is sought for the ________.

A synthetic CDO absorbs the ________, but not the ________, of the reference obligations.

Cash CDOs went a long way in providing banks with the opportunity to better manage their balance sheet. However, problems with cash CDOs including ________.

Which of the below statements is TRUE?

A credit-linked debenture (CLD) ________.

Which of the below statements is FALSE?

In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.

Which of the below statements is TRUE?

________ is a term used by Moody's to refer to an entity whose business activities and operations as well as its credit rating are based on detailed, predetermined parameters.

Assume a hypothetical credit default swap where the notional amount is $10 million and there are 92 actual days in a quarter. If the swap premium is 400 basis points (0.04) , what is the quarterly swap premium payment made by the protection buyer?

Which of the below statements is FALSE?

When the underlying pool of debt obligations consists of bond-type instruments (corporate and emerging market bonds) , a CDO is referred to as a . When the underlying pool of debt obligations is bank loans, a CDO is referred to as a .

In regards to a CDO structure, at least an A rating is typically sought for the at least a B rating is sought for the .

A synthetic CDO absorbs the , but not the , of the reference obligations.