1．Which of the following statements regarding loan covenants is FALSE?

A)   Loan covenant analysis is seldom used in the analysis of high-yield issues.

B)   Banks have a higher priority claim over a firm's assets.

C)   Negative covenants may prohibit the borrower from incurring additional debt.

D)   Empirical studies have found the returns of high-yield bonds to be more highly correlated with equity returns than with returns on investment grade bonds.

2．Which of the following does NOT represent special analyst considerations for high-yield corporate bonds?

A)   Analysis of debt structure.

B)   Corporate structure analysis.

C)   Covenant analysis.

D)   Cost of capital analysis.

3．When analyzing the credit risk of the holding company, it is critical for the analyst to focus on all of the following EXCEPT:

A)   ratio analysis of the parent company.

B)   the cash flows generated by the subsidiary.

C)   how the cash flows move from the subsidiaries to the parent company.

D)   how cash flows move between subsidiaries.

4．Which of the following statements regarding the analysis of covenants for high-yield issuers is FALSE?

A)   An analysis of covenants is more critical for high-yield issuers than for investment grade issuers.

B)   An analyst should examine whether a no contest clause exists that may change the priority of the claims of the firm's debtholders.

C)   Loopholes in the covenants may reveal the intentions of management.

D)   Covenants provide important insight into the issuing company's strategy.

5．When analyzing the credit risk of a holding company, it is important to understand:

A)   the lines of succession.

B)   the diversity of the subsidiaries.

C)   the corporate structure.

D)   the accounting methods used.

1．Which of the following statements regarding loan covenants is FALSE?

A)   Loan covenant analysis is seldom used in the analysis of high-yield issues.

B)   Banks have a higher priority claim over a firm's assets.

C)   Negative covenants may prohibit the borrower from incurring additional debt.

D)   Empirical studies have found the returns of high-yield bonds to be more highly correlated with equity returns than with returns on investment grade bonds.

The correct answer was  A)

Loan covenant analysis is especially important in the analysis of high-yield issues. Typically restrictive covenants are used to limit the corporate manager’s ability to participate in more speculative investments. The intentions of management may be revealed by their objections to certain covenants that they may interpret as “too restrictive.” All other statements are true.

2．Which of the following does NOT represent special analyst considerations for high-yield corporate bonds?

A)   Analysis of debt structure.

B)   Corporate structure analysis.

C)   Covenant analysis.

D)   Cost of capital analysis.

The correct answer was  D)

Special analyst considerations for high-yield corporate bonds include an analysis of debt structure, corporate structure, covenants, and equity.

3．When analyzing the credit risk of the holding company, it is critical for the analyst to focus on all of the following EXCEPT:

A)   ratio analysis of the parent company.

B)   the cash flows generated by the subsidiary.

C)   how the cash flows move from the subsidiaries to the parent company.

D)   how cash flows move between subsidiaries.

The correct answer was  A)  

The ratio analysis of the parent company provides little insight into the financial health of the company since the cash flows come from the subsidiary units of the parent company.

4．Which of the following statements regarding the analysis of covenants for high-yield issuers is FALSE?

A)   An analysis of covenants is more critical for high-yield issuers than for investment grade issuers.

B)   An analyst should examine whether a no contest clause exists that may change the priority of the claims of the firm's debtholders.

C)   Loopholes in the covenants may reveal the intentions of management.

D)   Covenants provide important insight into the issuing company's strategy.

The correct answer was  B)

It is especially important to analyze the covenant of a high yield issuer to gain insight into corporate strategy and reveal loopholes in the covenants.

5．When analyzing the credit risk of a holding company, it is important to understand:

A)   the lines of succession.

B)   the diversity of the subsidiaries.

C)   the corporate structure.

D)   the accounting methods used.

The correct answer was  C)

It is important to understand the corporate structure so the analyst can determine how cash is passed from subsidiaries to the parent company and to other subsidiaries.