Podcast Beta
Questions and Answers
What is the primary market responsible for?
What does venture capital primarily target?
Which investment strategy focuses on replicating a market index?
What distinguishes private equity from venture capital?
Signup and view all the answers
What is the purpose of an initial public offering (IPO)?
Signup and view all the answers
What is the Fed Funds Rate primarily used for?
Signup and view all the answers
Which of the following statements correctly describes LIBOR?
Signup and view all the answers
What does the term 'basis point' refer to?
Signup and view all the answers
How does securitization benefit lenders?
Signup and view all the answers
What is a Collateralized Debt Obligation (CDO)?
Signup and view all the answers
What is the primary asset backing a Mortgage-Backed Security (MBS)?
Signup and view all the answers
What role does securitization play in financial markets?
Signup and view all the answers
What characteristic distinguishes a CDO from other financial securities?
Signup and view all the answers
What are the different risk classes called that the SPV uses to categorize loans?
Signup and view all the answers
Which tranche typically receives the highest credit rating?
Signup and view all the answers
What role do credit rating agencies play in the securitization process?
Signup and view all the answers
What is the responsibility of the servicer in the cash flow distribution process?
Signup and view all the answers
Which financial intermediaries facilitate the movement of funds between savers and borrowers?
Signup and view all the answers
What is one technique used by SPVs to enhance the attractiveness of securities?
Signup and view all the answers
When cash flows are distributed, which tranche receives payment first?
Signup and view all the answers
What is the primary function of investment companies?
Signup and view all the answers
What is the primary function of a Mortgage-Backed Security (MBS)?
Signup and view all the answers
Which of the following best describes a Credit Default Swap (CDS)?
Signup and view all the answers
What is a systemic risk?
Signup and view all the answers
What is the first step in the securitization process?
Signup and view all the answers
What role does a Special Purpose Vehicle (SPV) play in securitization?
Signup and view all the answers
Why might lenders create asset pools during securitization?
Signup and view all the answers
What happens after the lender transfers assets to the SPV?
Signup and view all the answers
What is a key benefit of investing in asset-backed securities like MBS?
Signup and view all the answers
Study Notes
Important Interest Rates
- Fed Funds Rate: Overnight lending rate charged by depository institutions in the US for uncollateralized capital loans.
- LIBOR: Lending rate among banks in London, serving as a benchmark for short-term interest rates for securities like swaps or mortgages.
- Basis Point (bp): Measurement unit equal to one-hundredth of a percent; e.g., 10bp equals 0.10%.
Securitization
- Involves pooling various debt instruments into standardized securities to convert future cash flows into immediate cash.
- Facilitates lenders in offloading debt and risk from their balance sheets while generating liquidity.
- Results in creation of tradable securities backed by revenue-generating assets.
CDO and MBS
- Collateralized Debt Obligation (CDO): Investment product representing a bundle of loans, allowing holders to collect amounts from original borrowers.
- Mortgage-Backed Security (MBS): Debt security backed by mortgages, allowing investors to profit from the mortgage sector without direct involvement in home loans.
Credit Default Swap (CDS)
- Type of credit derivative offering protection against default; buyers make periodic payments to sellers.
- Sellers agree to compensate buyers for premiums and interest if the debt issuer defaults.
- Systemic Risk: Risk tied to widespread failures in the financial system, affecting capital providers' trust in institutions.
Securitization Process Steps
- Asset Origination: Lenders issue loans to borrowers.
- Asset Pooling: Lenders create a pool of loans with similar characteristics.
- Special Purpose Vehicle (SPV): Separate legal entity established to isolate loan assets from lender's balance sheet risks.
- Tranching: SPV divides loans into different risk classes, categorized as senior, mezzanine, and junior.
Further Securitization Steps
- Credit Enhancement: Techniques used to improve the attractiveness of securities to investors.
- Rating: Credit agencies assess and rate each tranche based on risk.
- Marketing and Sale: Securities marketed and sold to investors via investment banks.
- Cash Flow Distribution: Payments from borrowers are distributed to investors, prioritizing senior tranches.
- Monitoring: Servicer oversees loan performance, providing regular reports to investors.
Financial Intermediaries
- Institutions bridging the gap between savers and borrowers, including banks, pension funds, and investment banks.
- Investment Companies: Manage funds for investors, e.g., mutual funds and hedge funds.
- Investment Bankers: Specialize in underwriter roles for new securities issuance.
Market Definitions
- Primary Market: Where new securities are initially offered, such as during an IPO.
- Secondary Market: Previously issued securities are traded among investors.
- Initial Public Offering (IPO): First sale of company shares to the public.
Investment Management Strategies
- Passive Management: Strategy focused on replicating market index performance without active trading.
- Active Management: Strategy aimed at outperforming market indices through targeted investment decisions.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your knowledge on crucial interest rates like the Fed Funds Rate and LIBOR. This quiz covers the definition, significance, and impact of these rates on various financial markets. Perfect for finance students or anyone looking to deepen their understanding of interest rates.
