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In: Finance

3. Collateralized Debt Obligations (CDOs) (a) are Asset-Backed Securities (ABS) that are based only on sub-prime...

3. Collateralized Debt Obligations (CDOs)

(a) are Asset-Backed Securities (ABS) that are based only on sub-prime mortgage loans in the U.S.

(b) are not usually rated by rating agencies as the underlying default-free government securities act as collaterals.

(c) are structured in tranches according to the underlying risk characteristics.

(d) (a) and (b) of the above

(e) (b) and (c) of the above

4. Which of the following was NOT a contributing factor to the sub-prime debt crisis in the U.S.?

(a) The series of cuts in the U.S. official interest rate from late 2001 to reach the level of 1% by early 2004.

(b) The unregulated growth of the CDO market in the U.S..

(c) The unregulated sub-prime mortgage market in the U.S. that constantly supplied assets to be securitized.

(d) The Quantitative easing that led to a four-fold increase in the U.S. money base between Dec 2008 to Apr 2014.

(e) Increased demand for higher-yielding AAA rated USD dollar denominated financial assets.

5. Home equity in relation to the mortgage loan market refers to

(a) The difference between the current market price of the mortgaged house and the remaining amount in the mortgage loan.

(b) The difference between the purchase price of the mortgaged house and the remaining amount in the mortgage loan.

(c) The difference between the face value of the mortgage loan and the remaining amount in the mortgage loan.

(d) The difference between the purchase price and the current market price of the mortgaged house.

(e) None of the above is true

Solutions

Expert Solution

Answers-

Q 3)

The correct Option is c. are structured in tranches according to the underlying risk characteristics.

Option a, b, d and e are incorrect.

Collateralized debt obligations (CDOs) are structured investment products that contain various assets and loan products not just sub prime mortgages.

CDOs are rated but they have low ratings because of high risk.

Q 4)

The correct Option is d. The Quantitative easing that led to a four-fold increase in the U.S. money base between Dec 2008 to Apr 2014.
This was one of the major factors in pulling US out of recession from the sub prime mortgage crisis in 2008.

The options a,b,c and e are all contributing factor to the sub-prime debt crisis in the U.S.

Q 5)

The correct Option is a. The difference between the current market price of the mortgaged house and the remaining amount in the mortgage loan.

Home equity in relation to the mortgage loan market refers to mortgage equity is the difference between what you owe on your mortgage and the current value of your property.

The Options b, c, d, and e are incorrect.


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