FRM Part II · FRM Exam Part II · Tokenization and Financial Market Inefficiencies
A fund tokenizes a bond so that coupon payments are made automatically by code on each payment date, with no payment agent. Which statement best describes the main benefit and a residual risk of this programmability?
Programmability reduces manual processing and reconciliation costs by automating coupons, but smart contract coding errors can trigger wrong or irreversible payments. It does not remove issuer credit risk, legal enforceability requirements, or guarantee secondary market liquidity.
- AIt lowers operational processing costs, but smart contract coding errors can cause incorrect or irreversible paymentsCorrect
- BIt eliminates all credit risk of the issuer because payments are automated
- CIt removes the need for any legal enforceability of the bond terms
- DIt guarantees liquidity in the secondary market at all times
Explanation
Programmable payments reduce manual reconciliation and agent costs. However, code is only as good as its design, so bugs or flawed logic can misdirect funds, and blockchain transactions are often hard to reverse. Automation does not remove issuer credit risk, legal needs or ensure liquidity.
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