8006 Exam Dumps | A bank holding a basket of credit sensitive securities transfers these to a special purpose vehicle (SPV),

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PRMIA.8006.v2021-04-25.q101
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Question 81/101

A bank holding a basket of credit sensitive securities transfers these to a special purpose vehicle (SPV), which sells notes based on these securities to third party investors. Which of the following terms best describes this arrangement?

A. n-th to default swap

B. A credit default swap purchase

C. A synthetic CDO creation

D. A collateralized debt obligation issuance

Correct Answer: D

Explanation
A traditional collateralized debt obligation (CDO) involves the complete transfer of securities to an SPV, which then issues notes or securities to investors. Therefore Choice 'd' is the correct answer.
A synthetic CDO achieves the same result as a traditional CDO, but uses credit derivatives to synthetically create the same economic effect as a traditional CDO.
A credit default swap is a derivative instrument that pays in the event of the occurrence of agreed credit events. The arrangement described in the question is not a credit default swap purchase. n-th to default swap arrangements are similar to CDSs, but on a portfolio with the first 'n' losses being covered by the swap.

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