Reading 64: Overview of Bond Sectors and Instruments - LO following, class, reason, credit, security

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1.Which of the following reasons is the best reason NOT to enhance the credit quality of an asset backed security (ABS) pool?

A)    Liquidity.

B)    Regulatory.

C)    Cost.

D)    Increase the chance of bankruptcy.

2．Which of the following statements about asset backed securities (ABSs) is most accurate?

A)    The credit rating of an ABS must be the same as that of the issuer.

B)    Residential mortgages represent the largest type of asset that has been securitized.

C)    Credit enhancements are uncommon for ABS.

D)    There is an inverse relationship between credit enhancements and ratings.

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

A)    SPVs are also known as bankruptcy remote entities.

B)    SPVs shield the assets of the asset backed security from creditors.

C)    SPVs allow the asset backed security pool to have a higher credit rating than the issuing entity.

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

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

A)    SPVs have no role in the asset backed credit rating process.

B)    SPVs are used exclusively for asset backed transactions.

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

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

5．Which of the following entities play a critical role in the ability to create an asset backed security with a higher credit rating than the corporation?

A)    Rating agencies.

B)    Investment banks.

C)    Institutional investors.

D)    Special purpose vehicles (SPVs).

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答案和详解如下：

1.Which of the following reasons is the best reason NOT to enhance the credit quality of an asset backed security (ABS) pool?

A)    Liquidity.

B)    Regulatory.

C)    Cost.

D)    Increase the chance of bankruptcy.

The correct answer was C)

Credit enhancements increase the costs associated with borrowing using ABS.

2．Which of the following statements about asset backed securities (ABSs) is most accurate?

A)    The credit rating of an ABS must be the same as that of the issuer.

B)    Residential mortgages represent the largest type of asset that has been securitized.

C)    Credit enhancements are uncommon for ABS.

D)    There is an inverse relationship between credit enhancements and ratings.

The correct answer was B)

The credit rating of an ABS pool is a function of its credit enhancements, which are quite common. The more credit enhancements, the higher the ratings.

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

A)    SPVs are also known as bankruptcy remote entities.

B)    SPVs shield the assets of the asset backed security from creditors.

C)    SPVs allow the asset backed security pool to have a higher credit rating than the issuing entity.

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

The correct answer was D)

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

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

A)    SPVs have no role in the asset backed credit rating process.

B)    SPVs are used exclusively for asset backed transactions.

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

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

The correct answer was D)

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

5．Which of the following entities play a critical role in the ability to create an asset backed security with a higher credit rating than the corporation?

A)    Rating agencies.

B)    Investment banks.

C)    Institutional investors.

D)    Special purpose vehicles (SPVs).

The correct answer was D)

SPVs, or special purpose corporations, buy the assets from the corporation. The SPV separates the assets used as collateral from the corporation that is seeking financing. This shields the assets from other creditors.