Question

A financial institution plans to issue a group of bonds backed by a pool of automobile loans. However, they fear that the default rate on the automobile loans will rise well above 4 percent of the portfoliothe projected default rate. The financial institution wants to lower the interest payments if the loan default rate rises too high. Which type of credit derivative contract would you most recommend for this situation?

A. Credit-linked note

B. Credit option

C. Credit risk option

D. Total-return swap

E. Credit swap

Answer

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