Reading 63: Overview of Bond Sectors and Instruments-LOS i 习 2011, motivation, describe, security, purpose

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Session 15: Fixed Income: Basic Concepts
Reading 63: Overview of Bond Sectors and Instruments

LOS i: Define an asset-backed security, describe the role of a special purpose vehicle in an asset-backed security's transaction, state the motivation for a corporation to issue an asset-backed security, and describe the types of external credit enhancements for asset-backed securities.

 

 

Which of the following statements about special purpose vehicles (SPVs) is least accurate?

A) SPVs are also known as bankruptcy remote entities.

B) They are only used in asset backed security transactions.

C) SPVs shield the assets of an asset backed security from creditors of the corporation that is securitizing the assets.

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There are other advantages of SPVs dealing with the financial accounting of the assets sold.

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宋宅丕

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External credit enhancement least likely includes:

A) corporate guarantee.

B) bond insurance.

C) revenue fund.

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External enhancements include corporate guarantees and bond insurance. A revenue fund is not an external enhancement it is an internal enhancement.

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

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

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

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

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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.

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

A) Corporate guarantee.

B) Bond insurance.

C) Both of these choices are external credit enhancements.

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Both of the choices are commonly used external credit enhancements.

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There are several types of external credit enhancements. All of the following are examples of external credit enhancements EXCEPT:

A) setting aside reserve funds.

B) letters of credit.

C) corporate guarantees.

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Setting aside reserve funds is an example of internal, not external credit enhancement.

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Which of the following statements about special purpose vehicles (SPVs) is most accurate?

A) SPVs do not legally own the assets of the asset backed pool.

B) If bankruptcy occurs, a judge could rule that the SPVs assets can be considered general assets of the corporation.

C) SPVs are used exclusively for asset backed transactions.

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Legal experts believe this is unlikely, but the issue is still a bit ambiguous legally.

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

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

B) there are time constraints on the deal.

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

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