If a Tranche Spread Is 55 Basis Points and the Fixed

question 12

Multiple Choice

If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?

• A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year
• B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year
• C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year
• D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year

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Definitions:

Neurotic Anxiety

A form of anxiety resulting from an unconscious fear that the ego's control over unacceptable impulses of the id will fail, leading to punishment for inappropriate thoughts or behaviors.

Unconscious

In Freud’s topographic model, the part of personality that contains material that cannot easily be brought into awareness.

Implicit Punishments

Penalties for undesirable behavior that are not directly expressed or are implied, affecting behavior modification subtly.

Defense Mechanism

Psychological strategies brought into play by the unconscious mind to manipulate, deny, or distort reality in order to defend against feelings of anxiety and unacceptable impulses.