Global Structured Finance

Regarding credit risk in fixed income securities transactions, we can say that...

• A credit rating seeks to summarize the rating agency's view about a borrower’s ability to meet financial obligations

• Credit ratings aim at providing investment recommendations on securities that carry credit risk

• Credit enhancement methods are exclusively provided by third parties since originators cannot provide credit enhancement for their own assets

• All answers provided are false

Regarding credit risk, we can say that...

• Expected loss is a function of an investor's exposure, default probabilities and recovery rates

• Unexpected credit losses in fixed income markets exist and can be diversified

• Data on recovery rates for some fixed income securities can be fragmented and unreliable

• All answers provided are correct

Which of the following statements is FALSE?

• Fixed income securities can be issued in classes or tranches and each of them can have its own credit rating

• Fixed income securities can be issued in classes or tranches and each of them has a different level of seniority

• Fixed income securities can be issued in classes or tranches and all of them carry exactly the same risk/return profile since they emanate from the same originator

• Fixed income securities can be issued in classes or tranches and more junior tranches tend to attract investors with higher risk appetite

An investor has a portfolio of two securities:

- Security X for which the exposure is 3 million Euros and the probability of default is 0.5%.

- Security Z for which the exposure is 3.5 million Euros and the probability of default is 0.75%.

Assuming a recovery rate equal to 80% for these securities, compute the expected loss due to credit risk of the portfolio.

• 8250 Euros

• 3000 Euros

• 5250 Euros

• None of the other answers is correct

When talking about fixed income securities, we can say that duration is a measure of...

• Convexity of fixed income securities

• Interest rate risk

• The rate of change in credit ratings when prices change

• All answers provided are correct

Which of the following statements about fixed income securities is FALSE?

• Credit risk can affect those institutions investing in fixed income securities

• Government bonds are a type of fixed income security

• Three fixed income securities may have different levels of seniority even if they are issued by the same institution

• The value of a fixed income security increases when yields in the market increase

Regarding structured products issued in tranches, we can say that...

• They never benefit from credit enhancement mechanisms

• They compensate investors based on the cash flow stream generated by a pool of assets

• Senior tranches pay higher returns than other tranches

• All answers provided are false

A 5-year bond has face value of €1000 and fixed coupon rate of 5%. If currently the yield is 4%, the bond must be trading ...

• at par

• at discount

• at premium

• at default

Which of the following financial ratios is NOT used in the computation of the Altman Z-Score?

• Working capital/Total assets

• Price per share/Earnings per share

• EBIT/Total assets

• Retained earnings/Total assets

Which of the following is not considered by credit rating agencies when assessing an issuer's credit worthiness?

• Growth prospects of the issuer's industry

• Operational efficiency of the issuer

• Issuer's historical financial performance and profile

• Sensitivity of prices to interest rate changes of the specific class of fixed income security issued