Question

Letters of credit (L/Cs)

		a. Address informational asymmetries in international trade
		b. Protect the interests of sellers
		c. Protect the interests of buyers
		d. All of the above Issuers of securitized assets add to the appeal to investors by a. Overcollateralizing the pool b. Having private insurers insure the underlying assets in the pool c. Having credit rating agencies assign a credit rating to the pool d. All of the above The financial crisis a. Set back Ginnie Mae securities b. Set back Fannie Mae and Ginnie Mae securities c. Set back private-label MBS d. Gave the securitization process a much-needed boost How many separate zero-coupon securities can be created from a 7-year Treasury note through the STRIPs process? a. 1 b. 7 c. 15 d. None—the STRIPs process involves something entirely different CMOs typically use mortgage-backed securities to a. Create separate securities having different maturities b. Blend with junk bonds to reduce risk through diversification c. Reduce the volatility of cash flows d. Satisfy regulatory requirements

Answer 1

As per rules I am answering the first 4 subparts of the question

1: b

L/C is letter issued by bank of the importer to guarantee payment by the buyer. Hence it protects the payment for the seller. All other options are hence invalid.

2: c

Having credit ratings assigned to the pool make them more attractive to the investors as they rely on the independent credit agency. Overcollaterliazing or insuring is a means to secure the assets and not appeal the investors.

3: c

The financial crisis set back the private lable MBS. Freddie Mae and Ginni Mae securities are issued by the Government and so did not receive that much of impact. The securitization process was slower rather than boosted during this period.

4: c

Number of ZCB = 2*7+ 1 = 15. Hence other options are invalid.