Reading 64: Overview of Bond Sectors and Instruments - LO class, 2008, include, credit, black

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1.External credit enhancement does NOT include:

A)    bond insurance.

B)    revenue fund.

C)    a letter of credit from a bank.

D)    corporate guarantee.

2.Which of the following is a general problem associated with external credit enhancements? External credit enhancements:

A)    are only available on a short-term basis.

B)    are very long-term agreements and are therefore relatively expensive.

C)    are subject to the credit risk of the third-party guarantor.

D)    only provide protection against systematic risk, not against idiosyncratic risk.

3.Which of the following terms describe external credit enhancements for asset backed securities?

A)    Corporate guarantee.

B)    Letter of credit.

C)    All of these choices are external credit enhancements.

D)    Bond insurance.

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

A)    there are time constraints on the deal.

B)    there are regulatory constraints on the deal.

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

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

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

A)    issue asset backed securities.

B)    decrease credit enhancement.

C)    increase debt outstanding.

D)    issue commercial paper.

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答案和详解如下：

1.External credit enhancement does NOT include:

A)    bond insurance.

B)    revenue fund.

C)    a letter of credit from a bank.

D)    corporate guarantee.

The correct answer was B)

External enhancements include corporate guarantees, letters of credit from a bank, and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.

2.Which of the following is a general problem associated with external credit enhancements? External credit enhancements:

A)    are only available on a short-term basis.

B)    are very long-term agreements and are therefore relatively expensive.

C)    are subject to the credit risk of the third-party guarantor.

D)    only provide protection against systematic risk, not against idiosyncratic risk.

The correct answer was C)

According to the “weak link” philosophy adopted by rating agencies, the credit quality of an issue can not be higher than the credit rating of the third-party guarantor. Along these lines, if the guarantor is downgraded, the issue itself could be subject to downgrade even if the structure is performing as expected.

3.Which of the following terms describe external credit enhancements for asset backed securities?

A)    Corporate guarantee.

B)    Letter of credit.

C)    All of these choices are external credit enhancements.

D)    Bond insurance.

The correct answer was C)

All of the choices are commonly used external credit enhancements.

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

A)    there are time constraints on the deal.

B)    there are regulatory constraints on the deal.

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

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

The correct answer was D)

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

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

A)    issue asset backed securities.

B)    decrease credit enhancement.

C)    increase debt outstanding.

D)    issue commercial paper.

The correct answer was A)

Commercial paper is a short-term promissory note. Increasing debt would increase the cost of borrowing, as would decreasing credit enhancements.