1. Synthetic replication of a risky bond involves:

A. Shorting that bond and buying a credit default swap

B. Shorting a risk free bond and buying a credit default swap

C. Buying a risk free bond and selling a credit default swap

D. Buying that bond and selling a credit default swap

2. Throughout history, severe financial crises have most often been caused by:

A. Excessive use of derivatives

B. Real estate bubbles

C. Irrational euphoria in equity markets

D. Securitization

3. Assume Toyota is rated Aa3/AA- by Moody's and Standard & Poor's, respectively.

The Company issues a U.S. dollar 10-year bond at 98% of par with a coupon of

3.50%, which is paid semi-annually. You observe 10-year U.S. Government notes

currently have an effective annual yield of 3.20%. If 5-year credit default swaps on

Toyota's bonds are priced at .45% p.a. (i.e., 45 basis points), you can conclude:

A. The bonds are overvalued

B. The credit default swap is undervalued

C. Toyota's credit spread curve is negatively sloped beyond five years

D. None of the above