11. Note the following tranche schedule for this CDO.

	Amount ($millions)	YTM	Term (Mos)	Rating	CDS Enhanced
Tranche A	$15	1.98%	30	AAA	no
Tranche B	$85	2.75%	60	AA-	no
Tranche C	$250	3.05%	120	AA-	no
Tranche D	$250	4.87%	240	A	yes
Tranche Z	$50	6.12%	360	A	yes

Based on the above information, which tranche has the highest likelihood of the occurrence of a credit event?

1. Tranche A
2. Tranche B
3. Tranche C
4. Tranche D
5. Tranche Z

12.Which of the following statements are true about derivatives?

1. Derivatives are securities whose payoff is linked to another security; the payoff is never assured with certainty.
2. A swap is a derivative instrument between counterparties that only exchanges a series of cash flows for specific time period at specific intervals; notionals are never swapped.
3. Notionals are standardized and tradable derivatives.
4. All derivatives have potential outcomes which may be unfavorable to one of the parties.
5. One of the counterparties will always have off-balance-sheet liability risk.
   1. Only I. is true.
   2. Only II, III, IV and V are true.
   3. II and V are false; all others are true
   4. Only II and III are false, all the others are true
   5. None are correct (very tricky, professor)

13. True or False? The difference between an interest rate swap and a currency swap is that an interest rate swap is an exchange of fixed-interest payments for floating rate payments, while a currency swap is an exchange of two cash flows from sources denominated in different currencies.

14. True or False? There can be currency swaps that also exchange fixed- for floating-rates.

15. In the "liquidity index" measurement scheme, which of the following is/are true?

a. The index is higher if the bank's assets are more liquid.

b. The index is higher if the bank's assets are less liquid.

c. The index is higher if immediate asset liquidation requires lower prices.

d. b and c

e. a and c

16. The difference between a bank's average loans and its average deposits is called the:

a. financing gap

b. liquidity index

c. core deposit surplus

d. stored liquidity

e. purchased liquidity

17. Northridge First National Bank has a portfolio of collateralized debt obligations. Senior management decides to hedge their portfolio against loss of principal. To do so, they would:

a. purchase forward interest rate contracts.

b. become a counterparty to an interest rate swap.

c. purchase credit default swaps.

d. short the assets.

e. do none of the above.

18. A financial institution buys a $1 million bond issued by a large manufacturing company. The financial institution wants to protect itself from credit risk and pays a counterparty $1,000 annually in return for a promise from the counterparty to pay the financial institution the cash value of the loss from the credit event. As it turns out, trouble in the manufacturing industry causes a credit rating agency to lower the rating of the bonds after two years. As a result, the market value of the bonds falls by $12,000, and the financial institution decides to exercise its CDS on the bonds. In this case, how much is the the notional principal, or notional amount, of the derivative contract?

a. $2,000

b. $10,000

c. $12,000

d. $1,000,000

19. Bank solvency crises can be caused by all but which of the following reasons?

a. A bank may not be able to fund off-balance sheet loan commitments when they are exercised by the debtor.

b. Depositors may elect to withdraw funds from the bank all at once.

c. A bank suffers many unexpected loan failures at the same time.

d. Banks exercise CDS's to receive principal payment on defaulted bonds.

20. Ways in which banks can remediate liquidity risk includes all of the following except:

a. Write repurchase agreements, using short-term U.S. government notes as collateral.

b. Issue and sell short-term notes.

c. Issue and sell secondary common stock.

d. Sell off non-performing loans to a factor.

e. Borrow from the Federal Reserve Bank.