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Hull OFOD10e MultipleChoice Questions Only Ch08
Hull OFOD10e MultipleChoice Questions Only Ch08
Hull OFOD10e MultipleChoice Questions Only Ch08
4. Suppose that an ABS is created from a portfolio of subprime mortgages with the following
allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. Losses on
the mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on
the mezzanine tranche of the ABS
A. 50%
B. 60%
C. 80%
D. 100%
5. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The
portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from
the mezzanine tranches of the ABSs with the same allocation of principal. Losses on the
mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on the
mezzanine tranche of the ABS CDO
A. 50%
B. 60%
C. 80%
D. 100%
6. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The
portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from
the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio
prove to be 16%. What, as a percent of tranche principal, are losses on the senior tranche of the
ABS CDO
A. 50%
B. 60%
C. 80%
D. 100%
8. Which of the following survived the crisis without declaring bankruptcy or being taken over by
another financial institution?
A. Bear Stearns
B. Morgan Stanley
C. Lehman Brothers
D. Merrill Lynch
10. Which of the following describes the waterfall typically used for mortgages pre-crisis?
A. A distribution of cash flows to tranches with priority given to tranche with the highest
rating
B. A distribution of cash flows to tranches in proportion to their outstanding principals
C. A distribution of losses to tranches so that tranches bear losses in proportion to their
outstanding principals
D. None of the above
13. Which of the following is true as the correlation between mortgage defaults increases?
A. Equity tranches are almost certain to incur losses
B. Senior tranches become more likely to incur losses
C. The expected number of defaults increases
D. Equity tranches are unaffected
15. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 85%, mezzanine 10%, and equity 5%. (The
portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from
the mezzanine tranches with the same allocation of principal. How high can losses on the
mortgages be before the mezzanine tranche of the ABD CDO bears losses?
A. 5.0%
B. 5.5%
C. 6.0%
D. 6.5%
16. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 85%, mezzanine 10%, and equity 5%. (The
portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from
the mezzanine tranches with the same allocation of principal. How high can losses on the
mortgages be before the senior tranche of the ABS CDO bears losses?
A. 5.5%
B. 6.0%
C. 6.5%
D. 7.0%
17. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 94.5% (rated AAA), mezzanine 0.1% (rated BBB),
and equity 5% (rated C) . The portfolios of subprime mortgages have the same default rates. An
ABS CDO is then created from the mezzanine tranches. Which of the following is true?
A. The ABS CDO tranches should have ratings ranging from AAA to C
B. The ABS CDO tranches should all be rated BBB
C. The ABS CDO tranches should all be rated C
D. The ABS CDO tranches are almost worthless because the mezzanine tranches are so thin
18. Which of the following describes regulatory arbitrage?
A. Finding a way of reducing capital requirements without changing the risks being taken
B. Buying products that are not subject to regulation
C. Shorting products that are not subject to regulation
D. Trading with the government
20. Which of the following would be described by the term “liar loan”?
A. A situation where the lender concealed information from the borrower
B. A situation where the lender lied to the borrower about the interest rate
C. A situation where the borrower lied about the his or her income
D. None of the above