1.)

CDOs differ from conventional, pass-through mortgage-backed securities (MBS) in that

payouts are prioritized so that senior holders get paid first.

they were constructed to generate higher bond ratings compared to conventional MBS.

misestimation of default correlations of mortgages acting as collateral significantly altered expected values.

2.)

One of the reasons that CDOs became so popular prior to the financial crisis was

technology had not advanced to the point that made selling mortgages possible.

investors demanded high yields and did not care about safety.

investors sought safe assets with higher yields than U.S. Treasury securities.

banks sought to create securities that would be as attractive to investors as stocks.

3.)

Prior to the financial crisis of 2007-2009,

housing prices were very volatile.

housing prices remained unchanged for a long time.

borrowers rarely defaulted on mortgages.

the deliquency rate on mortgages was about 5%.

4.)

Read about the Troubled Asset Relief Program (TARP) here.

Approximately, how much was actually spent by the federal government on TARP program? Hint click on the TARP tracker for a detailed breakdown of funds.

		$700 billion
		$1 Trillion
		none
		$430 billion 5.)

Read the article on CDOs linked here and recall the discussion in class regarding these types of assets.

Which of the following is the best interpretation of this quote from the article?

"The events of spring 2005 might not be a true reflection of how these markets would function under stress," says the annual report of the Bank for International Settlements, an organization that coordinates central banks' efforts to ensure financial stability. To Stanford's Mr. Duffie, "The question is, has the market adopted the model wholesale in a way that has overreached its appropriate use? I think it has."

The model is not useful when securities are subject to systematic rather than idiosyncratic risk.

The model is completely flawed and will never be useful.

The model is not useful when securities are subject to idiosycratic rather than systematic risk.

6.)

Read the article from The Wall Street Journal Aug 13, 2007 located here.

According to the article, which of the following is correct?

The problems associated with sub-prime mortgages were largely confined to the United States.

The value of total sub-prime mortgages originated was 10 times larger than the value of mortgage backed securities (including CDOs) that were created from the mortgages.

The value of CDOs and synthetic CDOs based on sub-prime mortgages traded was at least 10 times larger than the total value of sub-prime mortgages.

The value of CDOs and synthetic CDOs that were created based on sub-prime mortgages was known to be about $500 billion .

7.)

According to the FDIC 2015 National Survey of Unbanked and Underbanked Households, which of the following individuals would be considered underbanked?

		Sally lives with her mother, who has a bank account. Sally does not. She recently received a loan from a payday loan company.
		Joel lives by himself and he does not have a checking or saving account. His employer pays him by loading funds on a stored-value card. He pays his rent and other bills using money orders.
		David lives with his brother and his brother has a checking account, but David does not. His employer pays him by loading funds on a stored-value card. David does not use any credit or financial services other than the stored value card.
		Olga has a checking account, but no savings account. She receives social security and has no credit from banks or elsewher.