ikoreaii

When analyzing the credit risk of a holding company, it is important to understand:

A) the corporate structure.

B) the diversity of the subsidiaries.

C) the lines of succession.

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It is important to understand the corporate structure so the analyst can determine how cash is passed from subsidiaries to the parent company and to other subsidiaries.

ikoreaii

Which of the following debt obligations exposes the firm to the risk of illiquidity due to rising interest rates?

A) Subordinated fixed-rate debt.

B) Reset notes.

C) Bridge loans.

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A reset note is a debt obligation where the coupon interest rate is reset periodically. As a result, the analyst needs to assess the impact that rising interest rates would have on the firm’s ability to honor these security contracts.
Subordinated fixed-rate debt is debt that is paid after other more senior debt is paid off.
A bridge loan is a short-term loan made in anticipation of intermediate-term and long-term financing.

ikoreaii

All of the following are characteristics of bank debt EXCEPT:

A) Banks have a high priority over the assets of the firm.

B) Bank debt tends to have a principal value that is indexed to the rate of inflation.

C) Bank debt is usually floating rate debt.

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Bank debt tends NOT to have a floating principal value.It does however typically have seniority over other claims and is usually at floating interest rates

ikoreaii

Which of the following statements regarding the debt structure of a high-yield issuer is least accurate?

A) High yield issuers rely on bank loans to a greater extent than investment-grade issuers.

B) Senior bondholder claims are subordinate to claims of bank loans.

C) A high-yield issuer can rely on a high-interest bank loan to provide liquidity if the firm has sufficient assets to cover at least 70% of the bank's claim.

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A bank will not grant a high-yield issuer a loan unless it has sufficient assets to cover the full loan amount. If the high-yield issuer cannot meet this requirement then it must defer to bridge loans and/or reset notes.

ikoreaii

Which of the following is NOT a primary factor considered by rating agencies in rating asset-backed securities?

A) Event risk.

B) Legal structure.

C) Credit quality of the collateral.

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When rating asset-backed securities, the rating agency considers collateral credit quality, seller/service quality, cash flow stress, and payment structure and legal structure.

ikoreaii

The most important issue for the credit analysis of an asset-backed security is:

A) quality of collateral.

B) quality of the seller/servicer.

C) legal structure.

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The analyst must determine the quality of the collateral. The collateral must generate the needed cash flow to service the debt.

ikoreaii

Which of the following is NOT a primary factor considered by rating agencies in rating asset-backed securities?

A) Character of the underwriter.

B) Seller/service quality.

C) Cash flow stress.

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When rating asset-backed securities, the rating agency considers collateral credit quality, seller/service quality, cash flow stress, and payment structure and legal structure.

ikoreaii

Which of the following statements regarding factors considered by rating agencies in rating asset-backed securities is least accurate?

A) A firm's credit rating must be less than or equal to its overall corporate rating.

B) The borrower's equity in an asset that has been offered as collateral is the primary determinant of whether the borrower will default or sell the asset to pay off the loan.

C) The servicer of the loan must be evaluated since the servicer is responsible for distributing proceeds to the bondholders, determining the interest rate for the period, and advancing payments when there are delinquencies.

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If a firm has structured securitized assets so that, in the event of bankruptcy, the courts will not apply the cash flow from the collateral toward the satisfaction of general corporate liabilities, then it is possible to obtain a credit rating higher than its overall corporate rating.

ikoreaii

When assessing the risk of tax-backed municipal bonds, it is important to analyze all of the following factors EXCEPT:

A) whether there are sufficient covenants to ensure revenues are not redirected for purposes other than the payment of tax-backed municipal bonds.

B) the issuer's ability and political discipline to maintain a sound budgetary policy.

C) evaluating the issuer's socioeconomic environment.

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When evaluating tax-backed debt the analyst should assess the issuer’s debt structure, budgetary policy, local tax and intergovernmental revenue availability, and the issuer’s socioeconomic environment.

ikoreaii

Which of the following securities is analyzed in much the same way as corporate bonds?

A) Foreign currency debt securities.

B) Municipal tax-backed debt.

C) Municipal revenue bonds.

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Revenue bonds are evaluated much like corporate bonds, because the primary concern is whether or not enough cash flow will be generated to satisfy the debt obligations.