CAIA - 35 - Structured Products I: Fixed Income Derivatives and Asset Backed Securities Flashcards Preview

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Flashcards in CAIA - 35 - Structured Products I: Fixed Income Derivatives and Asset Backed Securities Deck (37)
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1
Q

There are 2 broad approaches to model the term structure of interest rates:

1.

2.

A

There are 2 broad approaches to model the term structure of interest rates:

  1. Equilibrium
  2. Arbitrage-free
2
Q

___ models for modeling the term structure for interest rates assume a process for short-term interest rates and then use that process to look at the expected path of future interest rates.

A

Equilibrium models for modeling the term structure for interest rates assume a process for short-term interest rates and then use that process to look at the expected path of future interest rates.

3
Q

___-___models for modeling future interest rates project future interest rates in such a way that they are consistent with the observed term structure.

A

Arbitrage-free models for modeling future interest rates project future interest rates in such a way that they are consistent with the observed term structure.

4
Q

___ term structure model is a single-factor model that assumes that the short-term interest rate drifts toward a specific long-term mean.

A

Vasicek’s term structure model is a single-factor model that assumes that the short-term interest rate drifts toward a specific long-term mean.

5
Q

Vasicek’s Model

A
6
Q

Yield to Maturity in Vasicek

A
7
Q

CIR Model (Equation)

A
8
Q

A criticism of the Vasicek model is that it assumes the ___ of changes in the interest rates is constant as the ___ of interest rate changes.

A

A criticism of the Vasicek model is that it assumes the volatility of changes in the interest rates is constant as the level of interest rate changes.

9
Q

Ho and Lee Model

A
10
Q

Conditional Prepayment Rate (CPR)

A
11
Q

Absolute Prepayment Speed (ABS)

A
12
Q

Single Monthly Mortality (SMM)

A
13
Q

The ___, ___and ___ model modified the Vasicek model so that the variance of the short-term rate is proportional to the rate itself.

A

The Cox, Ingersoll and Ross (CIR) model modified the Vasicek model so that the variance of the short-term rate is proportional to the rate itself.

14
Q

___-___models of the term structure generate bonds that do not allow for arbitrage opportunities.

A

Arbitrage-free models of the term structure generate bonds that do not allow for arbitrage opportunities.

15
Q

The ___ and ___model assumes that the short-term interest rate follows a normally distributed process, with a drift parameter selected so that the modeled interest rates fit the observed structure of interest rates.

A

The Ho and Lee model assumes that the short-term interest rate follows a normally distributed process, with a drift parameter selected so that the modeled interest rates fit the observed structure of interest rates.

16
Q

The key disadvantage of the Ho and Lee model are that it assumes a very simple ___ process for bond prices and it can produce ___interest rates.

A

The key disadvantage of the Ho and Lee model are that it assumes a very simple binomial process for bond prices and it can produce negative interest rates.

17
Q

An ___ ___ ___is an interest rate derivative in which one party pays the other party when a specified reference rate exceeds a specific cap rate.

A

An interest rate cap is an interest rate derivative in which one party pays the other party when a specified reference rate exceeds a specific cap rate.

18
Q

A ___ is an interest rate cap that is guaranteed for one specific date.

A

A caplet is an interest rate cap that is guaranteed for one specific date.

19
Q

A ___ is a series of caplets and its price equals the sum of the caplet prices.

A

A cap is a series of caplets and its price equals the sum of the caplet prices.

20
Q

An ___ ___ ___ is an interest rate derivative in which one party pays the other when a specified reference rate is below a floor rate.

A

An interest rate floor is an interest rate derivative in which one party pays the other when a specified reference rate is below a floor rate.

21
Q

A ___ is an interest rate floor guaranteed for one specific date.

A

A floorlet is an interest rate floor guaranteed for one specific date.

22
Q

A ___ is a series of floorlets and its price equals the sum of the floorlet prices.

A

A floor is a series of floorlets and its price equals the sum of the floorlet prices.

23
Q

Issuers of floating rate debt can buy interest rate ___ to hedge their exposure.

A

Issuers of floating rate debt can buy interest rate caps to hedge their exposure.

24
Q

Lenders of floating-rate debt can buy interest rate ___ to hedge their exposure.

A

Lenders of floating-rate debt can buy interest rate floors to hedge their exposure.

25
Q

Since caps and floors are not typically exchange-traded instruments, buyers of these derivatives are exposed to ___ risk.

A

Since caps and floors are not typically exchange-traded instruments, buyers of these derivatives are exposed to counterparty risk.

26
Q

___ ___are bonds that can be redeemed by the bond issuer before maturity by making a set payment to the investor in a designated period.

A

Callable bonds are bonds that can be redeemed by the bond issuer before maturity by making a set payment to the investor in a designated period.

27
Q

Bond pricing models should account not only for interest rate risk but also for ___ risk.

A

Bond pricing models should account not only for interest rate risk but also for credit risk.

28
Q

Ignoring counterparty risk, payers in vanilla swaps benefit from ___ rates and suffer when rates ___.

A

Ignoring counterparty risk, payers in vanilla swaps benefit from increased rates and suffer when rates decline.

29
Q

Ignoring counterparty risk, receivers in vanilla swaps benefit from ___ rates and suffer when rates ___.

A

Ignoring counterparty risk, receivers in vanilla swaps benefit from declining rates and suffer when rates increase.

30
Q

Pension funds can use ___ ___ ___ or ___-___ ___ to reduce their interest rate risk.

A

Pension funds can use interest rates swaps or long-term bonds to reduce their interest rate risk.

31
Q

The ___ ___ ___ is a graphical representation of the relationship between swap rates and the maturities of their contracts.

A

The swap rate curve is a graphical representation of the relationship between swap rates and the maturities of their contracts.

32
Q

Prepayment risk is fairly ___ for auto loan backed securities.

A

Prepayment risk is fairly low for auto loan backed securities.

33
Q

Prepayment for most ABSs is measured by the ___ ___ ___ .

A

Prepayment for most ABSs is measured by the conditional prepayment rate (CPR).

34
Q

Auto Loan Backed Securities prepayment risk is typically measured using the ___ ___ ___.

A

Auto Loan Backed Securities prepayment risk is typically measured using the absolute prepayment speed (ABS).

35
Q

___-___ loans mean that lenders can collect only the loan collateral.

A

Non-recourse loans mean that lenders can collect only the loan collateral.

36
Q

Credit card and auto loans are (recourse/non-recourse) loans

A

Credit card and auto loans are recourse loans

37
Q

A ___ ___ ___ is an ABS that is secured by and receives cash flows from a pool of credit card receivables.

A

A credit card receivable is an ABS that is secured by and receives cash flows from a pool of credit card receivables.

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