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

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

 

1.

2. 

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

 

1. Equilibrium

2. Arbitrage-free

2

___ 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.

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

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

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

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

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

Vasicek's Model

6

Yield to Maturity in Vasicek

7

CIR Model (Equation)

8

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 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

Ho and Lee Model

10

Conditional Prepayment Rate (CPR)

11

Absolute Prepayment Speed (ABS)

12

Single Monthly Mortality (SMM)

13

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

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

14

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

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

15

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.

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

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.

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

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

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

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

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

19

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

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

20

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

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

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

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

22

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

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

23

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

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

24

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

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

25

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

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

26

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

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

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

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

28

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

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

29

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

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

30

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

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

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