Fixed Income - Fixed Income Section 1

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61. Analyst 1: Credit tranching allows investors to choose between extension risk and contraction risk.
Analyst 2: Time tranching allows investors to choose between extension risk and contraction risk.
Which analyst’s statement is most likely correct?

  • Option : B
  • Explanation : Time tranching or prepayment tranching allows investors to choose between extension risk and contraction risk.
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62. Credit tranching refers to creating a multi-layered capital structure that has:

  • Option : C
  • Explanation : Credit tranching refers to creating a multi-layered capital structure that has senior and subordinate tranches.
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63. Credit tranching refers to creating a multi-layered capital structure that has:

  • Option : C
  • Explanation : Time tranching helps investors in choosing between extension risk and contraction risk.
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64. Time tranching helps investors to choose between:

  • Option : C
  • Explanation : Time tranching helps investors in choosing between extension risk and contraction risk.
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65. Frank Smith obtains a recourse mortgage loan for $300,000. One year later, when the outstanding balance of the mortgage is $290,000, Frank cannot make his mortgage payments and defaults on the loan. The lender forecloses the loan and sells the house for $250,000. What amount is the lender entitled to claim from Frank?

  • Option : B
  • Explanation : In a recourse loan, the lender is entitled to claim the shortfall between the mortgage balance outstanding and the proceeds received from the sale of the property. i.e. 290,000 – 250,000 = 40,000.
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