Topic 36: Cash Collateralized Debt Obligations Test ID: 8829685

Question #1 of 13 Question ID: 440204

In the creation of collateralized obligations, a bank is likely to use a special purpose vehicle (SPV) by:

A) purchasing from the SPV the underlying asset pool backing a collateralized obligation.
B) having the SPV conduct an auction of mortgages and invest the proceeds in equity.
C) transferring the underlying asset pool of the collateralized obligation to the SPV.
D) having the SPV conduct an auction of credit-quality mortgages and invest the proceeds in subprime
loans.

Question #2 of 13 Question ID: 440198

Which of the following statements regarding cash collateralized debt obligations (CDOs) is FALSE?

A) During the reinvestment phase, cash flows from prepayments and default recoveries are reinvested.
B) An arbitrage CDO is issued to profit on the spread between the return on the underlying assets and
the return paid to investors.
C) Cash CDOs have three phases in their lifetime.
D) Balance sheet-driven are the majority of cash CDOs.

Question #3 of 13 Question ID: 440199

Collateralized debt obligations (CDOs) have experienced explosive growth over the last 20 years. Which of the following is NOT
one of the reasons for this growth?

A) Brokerage fees and management fees provide brokerages and asset managers a continuous source
of income.
B) Risky assets underlying a CDO exhibit high correlation with equity and bond markets. This allows
investors to gain exposure to these markets without the cost of purchasing individual securities.
C) The CDO structure allows for redistributing credit risk through credit tranching.
D) The CDO structure allows a firm to remove toxic assets from its balance sheet, reducing risk and
freeing up regulatory capital.

Question #4 of 13 Question ID: 440203

With respect to the assets underlying a collateralized debt obligation (CDO), the assets:

A) can either be actively managed or held static.

B) must be held static for at least a year before they can be actively managed.

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 C) must be actively managed and cannot be held static.
D) cannot be held static for more than a year and must be actively managed.

Question #5 of 13 Question ID: 440201

Regulatory arbitrage is associated with which of the following collateralized debt obligation (CDO) structures?

A) Balance sheet CDO.

B) Arbitrage CDO.
C) Cash flow CDO.
D) Market value CDO.

Question #6 of 13 Question ID: 440205

Which of the following is FALSE regarding SPVs? They:

A) use active management to earn high returns in CDOs.

B) have high credit risk due to CDO issuance.
C) are legally separate from their parent.
D) use balance-sheet CDOs to avoid alienating clients.

Question #7 of 13 Question ID: 440206

Which of the following statements regarding collateralized debt obligations (CDOs) is FALSE?

A) The senior tranche is usually paid a floating rate.

B) Mezzanine tranches receive a fixed rate.
C) Interest rate swaps are rarely used due to scrutiny from rating agencies.
D) The underlying assets are junk bonds, emerging market debt, bank loans, MBS, and ABS.

Question #8 of 13 Question ID: 440200

Which of the following statements regarding collateralized debt obligations (CDOs) is least accurate?

A) A balance sheet CDO is created by a firm seeking to reduce its loan exposure.
B) CDO tranches typically have a higher credit rating than the average rating of the debt instruments in
the underlying pool.

C) In order to create a CDO, the issuer packages a series of debt instruments and splits the package
into several tranches.

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 D) An arbitrage CDO refers to one created to profit from the spread between the rate earned on the
underlying debt obligations and the rate promised to the CDO buyers.

Question #9 of 13 Question ID: 444815

Which of the following financial instruments is least likely used as collateral for a collateralized debt obligation (CDO)?

A) corporate bonds.
B) residential mortgages.
C) government securities.
D) bank loans.

Question #10 of 13 Question ID: 444816

Which of the following statements is least accurate about collateralized debt obligations (CDOs)?

A) Managers of market value arbitrage CDOs can trade the underlying securities.
B) Market value arbitrage CDOs can sell mortgages in the collateral pool to pay promised investor
claims.
C) Market value arbitrage CDOs are growing rapidly in popularity.
D) Cash flow arbitrage CDOs use principal and interest payments by mortgage holders in the collateral
pool to pay promised investor claims.

Question #11 of 13 Question ID: 440207

Which of the following statements regarding the difference between a balance sheet CDO and an arbitrage CDO is CORRECT?

A) The typical asset structure of an arbitrage CDO is comprised of loans.

B) Balance sheet CDOs have a moral hazard problem in self selecting assets for collateral.

C) Residual interest is often sold to investors by the originator of a balance sheet CDO to reduce the
structure's credit risk.

D) Both CDO structures imply primarily active investment management.

Question #12 of 13 Question ID: 440202

A collateralized debt obligation (CDO) pays out in tranches where each tranche has a specific level of credit protection. Which of
the following lists tranches from highest priority of payment to lowest priority of payment?

A) Senior tranche, mezzanine tranche, equity tranche.

B) Equity tranche, collateralized tranche, mezzanine tranche.

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 C) Mezzanine tranche, equity tranche, senior tranche.
D) Collateralized tranche, equity tranche, mezzanine tranche.

Question #13 of 13 Question ID: 440208

Which of the following statements on CDOs are CORRECT?

I. Investor claims under a market value CDO are typically satisfied from the sale of securities from the collateral pool.
II. Static CDOs investments most resemble a balance sheet CDO.
III. Only actively managed CDOs have a ramp-up period, as these are typically more complex portfolios.
IV. Arbitrage CDO managers aim to maximize the funding gap between the collateral pool and the cash flows due to investors.

A) I, III and IV.

B) I and III.
C) II and IV.
D) I, II and IV.

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