FIN 480 FINAL STUDY GUIDE
Structured Finance - Answers - -Pooling of economic assets (loans, bonds and
mortgages)
-Sometimes tranches (risk varies)
SPV or SIV - Answers - Structured investment Vehicle
legally separate entity that purchases and bundles assets.
-Borrows short term assets, buys mortgages, removes from B.S., bundles, divides/
tranche.
-separate legally= get paid no matter what
MBS - Answers - -ABS back by mortgages (commercial or residential)
-Issued by GSE or private users
-allows to free up B.S. (sell)
ABS - Answers - -Pool of debts act similar to bond "pass through"-->evenly
or
-divided into "tranches"
(Dif levels of risk)
ABCP - Answers - -Form of Commercial paper collateralized by other fin assets
(ABS, MBS, CDO)
-short term (AAA mostly)
-SIV sells comm paper & uses funds buy assets (earns spread)
A MBS is most similar to a:
-stock
-Bond
-Demand Deposit
-Insurance Contract - Answers - Bond
Correlations - Answers - Lower correlation, the better the senior tranches do
Higher correlation, the better the junior tranches do
In general, when the correlations between assets in a tranched security increase, the
senior tranches _____ in value while the junior tranches ______ in value.
, A. Increase; increase
B.Decrease; decrease
C.Increase; decrease
D.Decrease; increase - Answers - D. Decrease; increase
CDO - Answers - -Similar to a ABS/MBS BUT uses fin instruments as collateral instead
of individual loans.
-SPE purchases portfolio of assets
-Bonds issued in tranches
CDO^2 - Answers - Take one or more tranches from multiple CDOs and divide it into
tranches.
-Very Risky (lots of defaults)
Ratings Shopping - Answers - Ask all 3 NRSROs what your rating would be and drop
the NRSO with lowest ratings.
Regulatory Arbitrage - Answers - a practice in which banks keep on their books assets
that have the same risk-based capital requirement but are relatively risky, such as a
loan to a company with a very low credit rating, while taking off their books low-risk
assets, such as a loan to a company with a very high credit rating
CDS - Answers - Credit Derivative allowing lenders to insure themselves against risk
that a borrower will default.
CDS buyer - Answers - Makes payments, like insurance premiums, to seller.
CDS seller - Answers - Seller agrees to pay buyer if any underlying loan or security
defaults
CDS buy/seller relationship - Answers - CDS buyer pays fee to transfer risk of default,
credit risk, to the CDS seller.
Naked CDS - Answers - Speculate (profit on default)
not actually hold underlying asset
CDS spread larger as the credit/default risk increases.
CDS contributes to fin crisi? - Answers - 1.Fostering uncertainty about who bears the
credit risk on a given loan or security
2.Making the leading CDS sellers mutually vulnerable
3.Making it easier for sellers of insurance to assume and conceal risk.
The buyer of a credit default swap (CDS)
Structured Finance - Answers - -Pooling of economic assets (loans, bonds and
mortgages)
-Sometimes tranches (risk varies)
SPV or SIV - Answers - Structured investment Vehicle
legally separate entity that purchases and bundles assets.
-Borrows short term assets, buys mortgages, removes from B.S., bundles, divides/
tranche.
-separate legally= get paid no matter what
MBS - Answers - -ABS back by mortgages (commercial or residential)
-Issued by GSE or private users
-allows to free up B.S. (sell)
ABS - Answers - -Pool of debts act similar to bond "pass through"-->evenly
or
-divided into "tranches"
(Dif levels of risk)
ABCP - Answers - -Form of Commercial paper collateralized by other fin assets
(ABS, MBS, CDO)
-short term (AAA mostly)
-SIV sells comm paper & uses funds buy assets (earns spread)
A MBS is most similar to a:
-stock
-Bond
-Demand Deposit
-Insurance Contract - Answers - Bond
Correlations - Answers - Lower correlation, the better the senior tranches do
Higher correlation, the better the junior tranches do
In general, when the correlations between assets in a tranched security increase, the
senior tranches _____ in value while the junior tranches ______ in value.
, A. Increase; increase
B.Decrease; decrease
C.Increase; decrease
D.Decrease; increase - Answers - D. Decrease; increase
CDO - Answers - -Similar to a ABS/MBS BUT uses fin instruments as collateral instead
of individual loans.
-SPE purchases portfolio of assets
-Bonds issued in tranches
CDO^2 - Answers - Take one or more tranches from multiple CDOs and divide it into
tranches.
-Very Risky (lots of defaults)
Ratings Shopping - Answers - Ask all 3 NRSROs what your rating would be and drop
the NRSO with lowest ratings.
Regulatory Arbitrage - Answers - a practice in which banks keep on their books assets
that have the same risk-based capital requirement but are relatively risky, such as a
loan to a company with a very low credit rating, while taking off their books low-risk
assets, such as a loan to a company with a very high credit rating
CDS - Answers - Credit Derivative allowing lenders to insure themselves against risk
that a borrower will default.
CDS buyer - Answers - Makes payments, like insurance premiums, to seller.
CDS seller - Answers - Seller agrees to pay buyer if any underlying loan or security
defaults
CDS buy/seller relationship - Answers - CDS buyer pays fee to transfer risk of default,
credit risk, to the CDS seller.
Naked CDS - Answers - Speculate (profit on default)
not actually hold underlying asset
CDS spread larger as the credit/default risk increases.
CDS contributes to fin crisi? - Answers - 1.Fostering uncertainty about who bears the
credit risk on a given loan or security
2.Making the leading CDS sellers mutually vulnerable
3.Making it easier for sellers of insurance to assume and conceal risk.
The buyer of a credit default swap (CDS)
