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11. Corporate debt securities that are offered continuously to investors by an agent of the issuer are best described as: A. medium-term notes. B. structured notes. C. range notes.

Ans: A; A is correct. One characteristic in which Medium-term notes differ from a regular corporate bond is that once registered medium-term notes can be “placed on the shelf” and sold in the market over time at the discretion of the issuer. B is not correct. A structured note is a debt security created when the issuer combines a typical bond or note with a derivative.

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12. An analyst is evaluating various debt securities issued by a company. The type of security that is most likely to yield the lowest recovery in a bankruptcy is a: A. debenture bond. B. collateral trust bond. C. mortgage bond.

Ans: A; A debenture bond is unsecured and would be expected to recover less should the company file for bankruptcy, while mortgage and collateral trust bonds are secured by real property.

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13. When a bank creates a collateralized loan obligation (CLO) to divest of commercial loans that it owns, the process is best described as a(n): A. arbitrage transaction. B. balance sheet transaction. C. capital infusion transaction.

Ans: B; B is correct because a balance sheet transaction is one that removes assets from the balance sheet of the institution and is often motivated by the desire to reduce the institution’s risk.

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14. A BBB-rated corporation wishes to issue debt to finance its operations at the lowest cost possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its primary motivation is most likely to: A. allow the corporation to retain a first lien on the assets of the SPV. B. segregate the assets into a bankruptcy-remote entity for bondholders. C. receive a guaranty from the SPV to improve the corporation’s credit rating.

Ans: B; B is correct because a key motivation for a corporation to establish a special purpose vehicle (SPV) is to separate it as a legal entity. In the case of bankruptcy for the corporation, the SPV is unaffected because it is not a subsidiary of the corporation. Given this arrangement, the SPV can achieve a rating as high as AAA and borrow at lower rates than the corporation. A is not correct. SPV does not allow the corporation to retain a first lien on its assets. C is not correct. The SPV receives a higher rating than the unsecured debt of the corporation, because the assets are transferred into a separate entity and shielded from the claims of the corporation’s general creditors.

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15. Mingle Corporation sold its receivables to a special purpose vehicle, MGT Corporation, created by Mingle for that purpose. If MGT sells securities backed by the receivables, the credit rating associated with those securities will most likely be based on the: A. creditworthiness of Mingle. B. creditworthiness of MGT. C. collateral and credit enhancement mechanisms used.

Ans: C; C is correct because the rating of asset-backed securities typically is independent of the issuer or originating firm’s credit; the rating depends on the collateral offered and the strength of any external or internal credit enhancements.