1. Most risks are correlated or interdependent. Give an example that shows the interaction of risks. Explain your answers.

2. Explain why the relationship of IO strips and the current interest rate is shown as the following graph.

3. What causes a Z class of a CMO to have characteristics of both a zero-coupon bond and a regular bond?

4. How does a risk-based deposit insurance program solve the moral hazard problem of excessive risk taking by banks?