Tiêu đề Reading 29 Credit Default Swaps.pdf ✅

Question #1 of 20 Question ID: 1473606 It is most accurate to state that the upfront payment associated with a credit default swap (CDS) is: A) sometimes made by the credit protection seller to the credit protection buyer. B) always zero due to the way CDS are priced at origination. C) greater when the reference obligation is high-yield debt rather than investment- grade debt. Question #2 of 20 Question ID: 1473609 In anticipation of an announcement of leveraged buyout of a publicly traded company, which of the following actions would be most appropriate? A) Buy the stock of the company and buy CDS protection on company’s debt. B) Sell protection of the company’s bond and buy put options on the company’s stock. C) Buy both the stock and the bonds of the company. Question #3 of 20 Question ID: 1473602 Regarding CDS credit events, a CDS is least likely to pay off upon occurrence of a: A) bankruptcy B) failure to pay C) restructuring. Idrissa Sylla and Joel Lynch both work for Kazenga Asset Management. The fund made losses on fixed income securities during the 2008 credit crunch and is keen to minimize the risk of losses due to credit events going forward. Sylla and Lynch have been tasked with writing a
report on the hedging of credit risk for the firm's investment committee. Extracts of their report are included below. Introduction: Credit Default Swaps (CDS) have the advantage of allowing the investor to separate credit risk and interest rate risk. Purchasing a CDS allows us to go long only the bond's credit risk. A single-name CDS allows us to purchase credit protection for a single reference entity. Typically, the reference obligation for a single-name CDS is a senior unsecured bond. Interestingly there is a payoff not only when the reference obligation defaults but when any bond of the issuer that ranks pari passu with the reference obligation defaults. The payoff received on a default will be the par value (notional principal) of the reference obligation less the value of the reference obligation after the credit event. Settlement after a credit event will either be physical delivery of the cheapest to deliver bond or alternatively a cash settlement. Illustration CTD: A credit event occurs for a single-name CDS with a three-year, senior bond as the reference obligation. The notional principal is $15m. Exhibit 1 shows bonds currently outstanding for the reference entity. Exhibit 1: Current Market Price of Reference Entity Bonds Bond type Price Bond Q: Subordinated unsecured 5-year maturity 30% of par Bond P: Senior unsecured 2-year maturity 45% of par Bond R: Senior unsecured 3-year maturity 50% of par Value after Inception of CDS: At initiation of a CDS, the CDS spread depends on the credit quality of the reference obligation at that point. Subsequent changes in credit quality of the reference obligation result in a gain or loss for the CDS holder. Entering an offsetting contract can monetize this gain (or loss). Exhibit 2 shows an illustration. Exhibit 2: Illustration
Notional principal covered £36,000,000 Coupon rate Duration Upfront Premium At initiation 1% 5 5% 1 year later 1% 4 8% The Credit Curve: The credit curve is the relationship between credit spreads and bond maturities for the same reference entity. Longer maturity bonds typically have a higher credit spread than shorter maturity bonds. An investor purchases a 'naked' CDS when the investor does not hold the reference obligation. Essentially, it is a pure bet on the credit prospects of the bond issuer. If we believe the credit quality of the issuer will deteriorate and hence the credit curve steepens, we should take a short position in the CDS. A curve trade is a type of long/short trade where the investor buys and sells protection on the same reference entity but with a different maturity. For example, if we were concerned about the credit risk in the short term but felt the entity's long term prospects were stronger, we would sell protection in a short maturity CDS and buy protection in a long maturity CDS. The improvement in the credit quality over time should cause the credit curve to flatten, resulting in a profit on the strategy. Question #4 - 7 of 20 Question ID: 1473597 Which of the three statements in the introductory paragraph is correct? A) The statement describing the separation of credit and interest rate risk. B) The statement describing the bonds covered by a single name CDS. C) The statement describing the payoff on a credit event. Question #5 - 7 of 20 Question ID: 1473598 Using the information under the heading "Illustration CTD," which of the three bonds would be the cheapest to deliver?
A) Bond Q. B) Bond P. C) Bond R. Question #6 - 7 of 20 Question ID: 1473599 Using information in Exhibit 2, the gain on the position is closest to: A) £1,080,000. B) £1,440,000. C) £4,320,000. Question #7 - 7 of 20 Question ID: 1473600 Which of the comments relating to the credit curve is least accurate? A) The definition of the credit curve. B) The description and example of the naked CDS position. C) The description and example of the curve trade. Question #8 of 20 Question ID: 1473607 Suppose that an investment-grade bond's five-year credit spread is 175 bps, and the duration of the associated CDS is four years. Assuming a 1% CDS coupon, the upfront premium (expressed as a percentage of the notional) required to purchase five-year CDS protection on the company's debt will be closest to: A) 8% B) 3% C) 4%
Question #9 of 20 Question ID: 1473590 Considering the two parties to a credit default swaps (CDS), the protection buyer is most likely to be: A) bullish on the financial condition of the reference entity. B) exposed to the credit risk of the protection seller. C) said to be long the reference entity’s credit risk. Question #10 of 20 Question ID: 1473605 A credit default swap (CDS) will change in value: A) only when default occurs. B) whenever the credit quality of the reference entity changes. C) only when a failure to pay, a bankruptcy, or a restructuring occurs. Question #11 of 20 Question ID: 1473604 Credit default swap (CDS) fixed payments are most likely to: A) be made until the maturity of the CDS whether a credit event occurs or not. B) be made by the protection seller to the protection buyer . C) be set at 1% for investment-grade debt and 5% for high-yield debt. Question #12 of 20 Question ID: 1473588