Reading 63: Overview of Bond Sectors and Instruments-LOS i 习 2011, motivation, describe, security, purpose

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Session 15: Fixed Income: Basic Concepts
Reading 63: Overview of Bond Sectors and Instruments

LOS i: Define an asset-backed security, describe the role of a special purpose vehicle in an asset-backed security's transaction, state the motivation for a corporation to issue an asset-backed security, and describe the types of external credit enhancements for asset-backed securities.

 

 

Which of the following statements about special purpose vehicles (SPVs) is least accurate?

A) SPVs are also known as bankruptcy remote entities.

B) They are only used in asset backed security transactions.

C) SPVs shield the assets of an asset backed security from creditors of the corporation that is securitizing the assets.

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There are other advantages of SPVs dealing with the financial accounting of the assets sold.

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Which of the following statements about asset backed securities (ABSs) is most accurate?

A) Residential mortgages represent the largest type of asset that has been securitized.

B) The credit rating of an ABS must be the same as that of the issuer.

C) Credit enhancements are uncommon for ABS.

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The credit rating of an ABS pool is a function of its credit enhancements, which are quite common. The more credit enhancements, the higher the ratings.

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Which of the following reasons is the best reason NOT to enhance the credit quality of an asset backed security (ABS) pool?

A) Liquidity.

B) Increase the chance of bankruptcy.

C) Cost.

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Credit enhancements increase the costs associated with borrowing using ABS.

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Which of the following entities play a critical role in the ability to create an asset backed security with a higher credit rating than the corporation?

A) Rating agencies.

B) Special purpose vehicles (SPVs).

C) Investment banks.

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SPVs, or special purpose corporations, buy the assets from the corporation. The SPV separates the assets used as collateral from the corporation that is seeking financing. This shields the assets from other creditors.

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Which of the following statements about special purpose vehicles (SPVs) is most accurate?

A) SPVs do not legally own the assets of the asset backed pool.

B) If bankruptcy occurs, a judge could rule that the SPVs assets can be considered general assets of the corporation.

C) SPVs are used exclusively for asset backed transactions.

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Legal experts believe this is unlikely, but the issue is still a bit ambiguous legally.

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The issuance of asset backed securities (ABSs) versus straight debt would be desirable if:

A) a better credit quality is desired on the asset backed versus the corporation.

B) there are time constraints on the deal.

C) the corporation's credit rating may go up in the future.

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If there are time constraints, straight debt would be easier to issue. Also, if the corporation could be upgraded, it would benefit in straight debt but not its ABSs.

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To reduce the cost of long-term borrowing, a corporation with a below average credit rating could:

A) decrease credit enhancement.

B) issue commercial paper.

C) issue asset backed securities.

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Commercial paper is a short-term promissory note. Decreasing credit enhancements increase the cost of borrowing.

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A corporation may issue asset backed securities because:

A) both of the reasons are valid.

B) it wants to change the structure of its balance sheet.

C) it wants to reduce the cost of borrowing.

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Both of the reasons are valid.

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Which of the following statements concerning asset-backed securities (ABSs) is least accurate?

A) The asset-backed pool may be overcollateralized to provide a credit enhancement.

B) Typical assets to securitize are auto loans and credit card receivables.

C) ABSs typically have lower debt ratings than the firm's other borrowings.

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The objective of the firm with an ABS issue typically is to get a higher debt rating (a lower cost of borrowing). Typically, the ABS has a higher debt rating, perhaps because of credit enhancements.

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External credit enhancement least likely includes:

A) corporate guarantee.

B) bond insurance.

C) revenue fund.

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External enhancements include corporate guarantees and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.