LOS o: Discuss distressed securities investing and compare venture capital investing with distressed securities investing.

Q1. Investing in distressed securities and venture capital investing are similar in all of the following ways EXCEPT:

A)   a large investment requirement.

B)   illiquid investments.

C)   heavy involvement by investors.

Q2. A typical distressed security investment strategy would involve purchasing:

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

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

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

Q3. Investing in distressed securities is most similar to investing in which of the following asset classes?

A)   Exchange-traded funds.

B)   Venture capital.

C)   Hedge funds.

Q4. The securities of companies that are either close to bankruptcy or have already filed for bankruptcy protection are called:

A)   inactively traded securities.

B)   distressed securities.

C)   discount securities.

LOS o: Discuss distressed securities investing and compare venture capital investing with distressed securities investing. fficeffice" />

Q1. Investing in distressed securities and venture capital investing are similar in all of the following ways EXCEPT:

A)   a large investment requirement.

B)   illiquid investments.

C)   heavy involvement by investors.

Correct answer is A)        

Only venture capital requires a large investment. Both remaining choices are true of both investing in distressed securities and investing in venture capital.

Q2. A typical distressed security investment strategy would involve purchasing:

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

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

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

Correct answer is A)        

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.

Q3. Investing in distressed securities is most similar to investing in which of the following asset classes?

A)   Exchange-traded funds.

B)   Venture capital.

C)   Hedge funds.

Correct answer is B)

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.

Q4. The securities of companies that are either close to bankruptcy or have already filed for bankruptcy protection are called:

A)   inactively traded securities.

B)   distressed securities.

C)   discount securities.

Correct answer is B)

Inactively traded securities are infrequently traded, but the name “inactively traded” does not imply anything about the financial condition of the company. “Discount” is a description 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.

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