1.The securities of companies that are either close to bankruptcy or have already filed for bankruptcy protection are called:

A)   distressed securities.

B)   inactively traded securities.

C)   illiquid securities.

D)   discount securities.

2.Investing in distressed securities is most similar to investing in which of the following asset classes?

A)   Hedge funds.

B)   Commodities.

C)   Venture capital.

D)   Exchange-traded funds.

3.A typical distressed security investment strategy would involve purchasing:

A)   the debt of a distressed company, allowing the company to utilize the infusion of capital to avoid bankruptcy.

B)   a controlling equity position in a company experiencing financial difficulties and replacing management with a team of turnaround specialists.

C)   an equity position in order to dilute the position of the company’s creditors.

D)   the debt of a struggling company, with the goal of ending up with an equity position in the reorganized company.

4.Investing in distressed securities and venture capital investing are similar in all of the following ways EXCEPT:

A)   illiquid investments.

B)   a long investment horizon.

C)   heavy involvement by investors.

D)   a large investment requirement.

1.The securities of companies that are either close to bankruptcy or have already filed for bankruptcy protection are called:

A)   distressed securities.

B)   inactively traded securities.

C)   illiquid securities.

D)   discount securities.

The correct answer was A)

Inactively traded securities are infrequently traded, but the name “inactively traded” does not imply anything about the financial condition of the company. “Illiquid” and “discount” are descriptions that may be applied to any of number of investment vehicles available. Distressed securities are the securities of companies in the midst of financial difficulties.

2.Investing in distressed securities is most similar to investing in which of the following asset classes?

A)   Hedge funds.

B)   Commodities.

C)   Venture capital.

D)   Exchange-traded funds.

The correct answer was C)

Investing in distressed securities is similar to venture capital investing because both strategies seek an equity position in a company that is eventually successful. Both are illiquid investments with long time horizons.

3.A typical distressed security investment strategy would involve purchasing:

A)   the debt of a distressed company, allowing the company to utilize the infusion of capital to avoid bankruptcy.

B)   a controlling equity position in a company experiencing financial difficulties and replacing management with a team of turnaround specialists.

C)   an equity position in order to dilute the position of the company’s creditors.

D)   the debt of a struggling company, with the goal of ending up with an equity position in the reorganized company.

The correct answer was D)

A typical strategy is to invest in the debt of a company, continue to hold the position throughout the bankruptcy negotiations, and ultimately end up with equity in the new, revitalized operation.

4.Investing in distressed securities and venture capital investing are similar in all of the following ways EXCEPT:

A)   illiquid investments.

B)   a long investment horizon.

C)   heavy involvement by investors.

D)   a large investment requirement.

The correct answer was D)

Only venture capital requires a large investment. The other three choices are true of both investing in distressed securities and investing in venture capital.