Test bank fundamentals of futures and options markets 7e by hull chapter 23

Test Bank: Chapter 23 Credit Derivatives Suppose that the cumulative default probability for a company for years one, two, three and four are 3%, 6.5%, 10%, and 14.5% (i) What is the unconditional default probability for year four _ _ _ _ _ (ii) What is the default probability for year four conditional on no default in earlier years The number of companies underlying the CDX NA IG index is (Circle one) (a) 50 (b) 75 (c) 100 (d) 125 The companies underlying the iTraxx index are (Circle one) (a) Rated A or above (b) Rated BBB or above (c) Rated BB or below (d) Rated BBB or below In a CDS with a notional principal of $100 million the reference entity defaults The payoff to the buyer of protection when the recovery rate is 30% is (Circle one) (a) $100 million (b) $30 million (c) $130 million (d) $70 million In a one-year forward contract on a CDS that will last five years, what happens if there is a default during the first year? (Circle one) (a) There is a payoff to the forward protection buyer at the time of default (b) There is a payoff to the forward protection buyer at the end of one year (c) There is a payoff to the forward protection buyer at the end of six years (d) The contract ceases to exist The recovery rate of a bond is normally defined as (Circle one) (a) The value of the bond immediately after default as a percent of its face value (b) The value of the bond immediately after default as a percent of the sum of the bond’s face value and accrued interest (c) The amount finally realized by a bondholder as a percent of face value (d) The amount finally realized by a bondholder as a percent of the sum of the bond’s face value and accrued interest Which of the following is true (Circle one) (a) Risk neutral default probabilities are usually much lower than real world default probabilities (b) Risk neutral default probabilities are usually much higher than real world default probabilities (c) Risk neutral and real world probabilities must be close to each other if there are to be no arbitrage opportunities default (d) Risk-neutral default probabilities cannot be calculated from CDS spreads Fill in the blank: A CDO created from CDSs is known as a _ _ _ _ _ _ CDO Which of the following happens when default correlation of the companies underlying a CDO increases (Circle one) (a) The value of the senior tranche and the equity tranche to the protection buyer both increase (b) The value of the senior tranche and the equity tranche to the protection buyer both decrease (c) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases (d) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases ...(d) The amount finally realized by a bondholder as a percent of the sum of the bond’s face value and accrued interest Which of the following is true (Circle one) (a) Risk neutral... (b) The value of the senior tranche and the equity tranche to the protection buyer both decrease (c) The value of the senior tranche to the protection buyer decreases and the value of the equity... a _ _ _ _ _ _ CDO Which of the following happens when default correlation of the companies underlying a CDO increases (Circle one) (a) The value of the senior tranche and the equity tranche to