Collateralized Debt Obligations (CDOs) were created to fill a need in the financial markets, in part...

  

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Collateralized Debt Obligations (CDOs) were created to fill a need in the financial markets, in part to facilitate greater intermediation between borrowers and lenders. (i) How can CDOs help a bank issue more mortgages than it already does? (ii) If a pool of mortgages is fairly risky, how can CDOS backed by those mortgages be rated investment grade? (iii) What are some of the risks to the financial sector in repackaging debt as CDOS? (8 points) A year ago you purchased a bond with yield 10 % and spread 2%. Now the yield is 12%. (i) What are possible reasons for the change in the yield? (ii) What does this tell us about the current spread on the bond? (8 points) Given two otherwise identical loans, the expected values for Loss Given Default may be very different if certain characteristics of the loans are different. List four characteristics that may give rise to differences in LGD, and for two of them explain why they are indicative of greater or lesser risk. Collateralized Debt Obligations (CDOs) were created to fill a need in the financial markets, in part to facilitate greater intermediation between borrowers and lenders. (i) How can CDOs help a bank issue more mortgages than it already does? (ii) If a pool of mortgages is fairly risky, how can CDOS backed by those mortgages be rated investment grade? (iii) What are some of the risks to the financial sector in repackaging debt as CDOS? (8 points) A year ago you purchased a bond with yield 10 % and spread 2%. Now the yield is 12%. (i) What are possible reasons for the change in the yield? (ii) What does this tell us about the current spread on the bond? (8 points) Given two otherwise identical loans, the expected values for Loss Given Default may be very different if certain characteristics of the loans are different. List four characteristics that may give rise to differences in LGD, and for two of them explain why they are indicative of greater or lesser risk.

Answer rating: 100% (QA)

i CDOs help a bank issue more mortgages than it already does by allowing the bank to pool various mortgages together and create tranches of securities ... View the full answer