Question 1

The compensation form a CDS can come from

Accepted Answer

Both A and B can provide compensation for a CDS. With A, the CDS holder delivers the defaulted bond to the CDS issuer in return for the bond's par value. With B, the CDS issuer pays the swap holder the difference between the par value of the bond and the bond's market price. The federal government is not involved in CDS compensation, so C is not the correct answer. Therefore, the best choice is D, as both A and B can provide compensation for a CDS.

Question 2

CDOs are divided in tranches

Accepted Answer

CDOs are divided into tranches, with each tranche representing a different level of seniority in terms of its claims on the underlying pool of assets. This means that some tranches have a higher priority in terms of receiving payments, while others have a lower priority. Additionally, each tranche represents securities with varying degrees of credit risk, with lower tranches being riskier but also offering potentially higher returns. Therefore, the correct answer is E, as both options A and B are correct. Option C is incorrect because all tranches have some level of credit risk, while option D is incorrect because equity tranches are among the riskiest.

Question 3

SIVs are

Accepted Answer

SIV stands for structured investment vehicle, which is a type of off-balance sheet investment vehicle that invests in a portfolio of assets such as mortgage-backed securities, asset-backed securities, and other fixed-income instruments. SIVs are often set up by financial institutions to earn a spread between the short-term borrowing rate and the long-term investment return.

Question 4

Why are many bonds callable? What is the disadvantage to the investor of a callable bond? What does the investor receive in exchange for a bond being callable? How are bond valuation calculations affected if bonds are callable?

Accepted Answer

The answer of Why are many bonds callable? What is...

Question 5

If you are buying a coupon bond between interest paying dates,is the amount you would pay to your broker for the bond more or less than the amount quoted in the financial quotation pages? Discuss the differences and how these differences arise.

Accepted Answer

The answer of If you are buying a coupon bond...

Question 6

Discuss the taxation ramifications of zero coupon bonds.How has this taxation procedure changed over the years? How has this change affected the demand for these bonds?

Accepted Answer

The answer of Discuss the taxation ramifications of zero coupon...

Question 7

You purchased a zero-coupon bond that has a face value of $1,000,five years to maturity,and a yield to maturity of 7.3%.It is one year later and similar bonds are offering a yield to maturity of 8.1%.You will sell the bond now.You have a tax rate of 40% on regular income and 15% on capital gains.Calculate the following for this bond.
• the purchase price of the bond
• the current price of the bond
• the imputed interest income
• the capital gain (or loss)on the bond
• the before-tax rate of return on this investment
• the after-tax rate of return on this investment

Accepted Answer

The answer of You purchased a zero-coupon bond that has...

Question 8

Mortgage-backed CDOs were a disaster in 2007 because

Accepted Answer

Mortgage-backed CDOs were problematic because they included sub-prime mortgages (B), home prices stalled (C), and many mortgages were variable rate loans that became unaffordable as interest rates increased (D).

Question 9

SIVs raise funds by ______ and then use the proceeds to ______.

Accepted Answer

SIVs raise funds by issuing short-term commercial paper and then use the proceeds to buy other forms of debt such as mortgages. This allows for leverage and potentially higher returns, but also carries greater risks in the event of market disruptions. Option A, which involves retiring other forms of debt, may not make sense for funds whose goal is to increase returns through leverage. Option C and D, which involve issuing long-term bonds, do not accurately describe the funding strategy of SIVs.

Quiz 14: Bond Prices and Yields