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发表于 2012-4-2 16:07
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Brad Taylor is a portfolio manager for a small firm that caters to high net worth individuals. He invests substantial amounts of his clients’ assets in fixed incomes securities, while his partner deals primarily with his clients’ equity investments. Taylor’s particular areas of analytical expertise include corporate bonds, asset-backed securities (ABS), and foreign government bonds. Being in a small firm, Taylor is involved in every aspect of managing the fixed income portion of the portfolio, from the initial identification of a potential investment, to the analysis, and on to the purchase decision. In addition, he also performs an ongoing analysis of assets currently held in the portfolio.
As the size of the portfolio has grown over the past two years, Taylor has become increasingly aware of the fact that he needs to acquire additional support staff in order to adequately perform his fiduciary duties. He has recently hired a new trading assistant, Donald Johnson, whose prior position was at a firm that invested exclusively in equity securities. Johnson has not had much experience in the analysis of fixed income securities and realizes that there are some significant differences between the credit analyses of equities versus that of fixed income securities. He is trying to understand how to evaluate the credit quality of fixed income securities in the specific sectors of corporate bonds, ABS, and foreign government bonds. Taylor suggests that to begin, Johnson should review one of Taylor’s old fixed income textbooks, to become more familiar with the concepts. Johnson needs to be able to identify which key ratios are used in fixed income analysis, how to calculate them, and the how to interpret them. He is familiar with basic mechanics of a cash flow analysis of an equity investment, but needs to understand why and how cash flow from operations can affect the value of a fixed income security. In addition, Taylor expects Johnson to quickly have a strong working knowledge of each of the following areas: corporate bonds and the measurement of their capitalization and solvency; ABS and the factors that will determine an issue’s rating; and foreign government bonds and the economic and political risks that can affect their performance.Johnson is not sure what is meant by a short-term solvency ratio. Which of the following ratios is a measure of short-term solvency? A)
| EBIT interest coverage ratio. |
| | C)
| Total debt to capitalization ratio. |
|
The current ratio is defined as current assets divided by current liabilities. It is a measure of the adequacy of liquid assets for meeting short-term obligations as they come due. The total debt to capitalization ratio is equal to the sum of current liabilities and long-term debt divided by the sum of long-term debt and shareholders’ equity. It includes longer term assets and liabilities that are not as liquid.
The EBIT interest coverage ratio is earnings before interest and taxes divided by the annual interest expense. It is not a suitable measure of short-term solvency. (Study Session 14, LOS 48.c)
Johnson has read about the importance of coverage ratios in order to evaluate the credit risk of a corporate bond. Which of the following statements is most correct? Coverage ratios are used to: A)
| judge the capital adequacy of liquid assets for meeting short-term obligations as they come due. |
| B)
| test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations. |
| C)
| determine the capital adequacy of long-term assets to meet long-term debt obligations. |
|
Examples of coverage ratios are: EBIT interest coverage ratio, EBITDA interest coverage ratio, funds from operations to total debt ratio, and free operating cash flow to total debt ratio. (Study Session 14, LOS 48.c)
Johnson asks Taylor to calculate discretionary cash flow using S&P’s cash flow framework as defined in its Corporate Ratings Criteria. Which of the following is the most correct? A discretionary cash flow: A)
| is equal to free operating cash flow − acquisitions + asset disposals + other miscellaneous sources (uses). |
| B)
| is equal to net income + depreciation +- other noncash charges. |
| C)
| remains available to a company after it funds its operating requirements, capital expenditures, and cash dividends. |
|
Discretionary cash flow is defined in the S&P cash flow framework as operating cash flow − capital expenditures − cash dividends
(Study Session 14, LOS 48.e)
Johnson turns his attention to ABSs. Which of the following is the least important factor considered by rating agencies in assigning a credit rating to ABS? A)
| Quality of the seller/servicer. |
| B)
| Cash flow stress and payment structure. |
| C)
| Covenants of the lending agreement. |
|
Lending agreement covenants are not a major factor considered by rating agencies.
The role of the servicer is critical in an asset-backed security transaction. Therefore, rating agencies look at the ability of a servicer to perform all the activities that a servicer will be responsible for.
The payment structure of an asset-backed security transaction can be either a passthrough or pay through structure. This has important implications for the distribution of the cash flows to the different tranches of the security. (Study Session 14, LOS 48.b)
Taylor explains to Johnson that there are major differences between ABS and corporate bonds in terms of credit risk. Which of the following is a major difference? ABS have: A)
| a smaller predictability of cash flows due to the higher operational risk. |
| B)
| a greater predictability of cash flows due to the absence of operational risk. |
| C)
| the same predictability of cash flows but a lower operational risk. |
|
In an ABS transaction the role of the servicer is to simply collect the cash flows. There is no active management with respect to the collateral and so very little operational risk associated with cash flows. Conversely, corporate management includes tremendous operational risk. (Study Session 14, LOS 48.a, b)
Taylor tries to explain the subtleties of foreign sovereign debt to Johnson. Which of the following is least likely a factor used in assessing the credit quality of a national government's local currency debt? A)
| Balance of payments and external balance sheet structure. |
| B)
| Monetary policy and inflation pressures. |
| C)
| Income and economic structure. |
|
In assessing the credit quality of local currency debt, only domestic government policies that emphasize fostering or impeding timely debt service are considered. Only for foreign currency debt will credit analysis focus on the interaction of domestic and foreign government policies as measured by a country's balance of payments and the structure of its external balance sheet. (Study Session 14, LOS 48.d) |
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