AIM 1: List the four factors that may lead to suboptimal loan recovery rates.

The inefficient debtor behavior that can lead to “creditors’ run” is associated with:

A) kernel calibration.

B) beta distribution.

C) house banking.

D) the debt structure. 

The correct answer is D

The debt structure can lead to inefficient behavior. “Creditors’ run” can occur if there is no creditors’ coordination.

AIM 2: Know and discuss the factors affecting recovery rates of traded bonds

1、With regard to the factors that determine recovery rates of traded bonds, which of the following statements is most correct?

A) State mandatory reorganizing procedures for distressed firms will result in higher recovery rates than if the firm informally reorganized.

B) The more bank debt a firm has, the lower the recovery rates on the firm’s traded bonds.

C) More senior claimants have lower recovery rates on the firm’s traded bonds.

D) A large number of vulture funds would decrease the recovery rate.

The correct answer is B

Because bank debt tends to be senior and has the highest level of collateralization, the more bank financing a firm uses, the lower the recovery rate on the traded bonds. More senior claimants would have higher recovery rates because their claims are senior to other debtors. A large number of vulture funds--buyers of bonds in default--would increase the recovery rate. Also, when a distressed firm can informally reorganize (i.e., avoid state mandatory procedures) then the informal reorganization can increase recovery rates.

2、Collateralization is a measure of:

A) the level to which the debt of the firm is insured by a third party.

B) the liquidity of the assets the firm holds.

C) how specific assets have been assigned to different claimants in the event of default.

D) None of the above.

The correct answer is C

Collateralization is a measure of how specific assets have been assigned to different claimants in the event of default.

AIM 3: Discuss the beta distribution, kernel modeling, and conditional recovery modeling as estimates of a recovery function.

1、Which of the following statements regarding the beta distribution used in the modeling of recovery functions is FALSE?

A) The beta distribution is a nonparametric distribution.

B) The beta distribution does not fit bimodal recovery functions well.

C) The beta distribution only requires two inputs for calibration.

D) The beta distribution can be skewed, symmetric, or convex.

The correct answer is A

The beta distribution is a parametric distribution. The beta distribution does not fit bimodal recovery functions well, and only requires two inputs for calibration. In addition, it can be skewed, symmetric, or convex.