ikoreaii

Which of the following statements concerning corporate bonds is most accurate? The denomination is usually:

A) $1,000, and the maturities usually range from 10 to 20 years.

B) $100,000, and the maturities usually range from 5 to 10 years.

C) $1,000, and the maturities usually range from 5 to 10 years.

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Corporate bonds usually have a face value of $1,000 and mature between 5 and 10 years.

ikoreaii

What is the typical face value of a corporate bond?

A) $1,000.

B) $100,000.

C) $100.

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The most common face value of a corporate bond is $1,000.

ikoreaii

Which of the following statements concerning taxable bonds is most accurate?

A) Treasuries have the lowest yields, followed by corporates, then by agencies, which provide the highest returns.

B) Treasuries have the lowest yields, followed by agencies, then by corporates, which provide the highest returns.

C) Corporates have the lowest yields, followed by Treasuries, then by corporates, which provide the highest returns.

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The difference in yields is largely due to the default risk premium. Treasuries are considered to be default-risk free, while corporate bonds have the highest default risk.

ikoreaii

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) SPVs are used exclusively for asset backed transactions.

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

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

ikoreaii

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) Special purpose vehicles (SPVs).

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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.

ikoreaii

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) Cost.

C) Increase the chance of bankruptcy.

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Credit enhancements increase the costs associated with borrowing using ABS.

ikoreaii

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.

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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.

ikoreaii

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

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

B) SPVs are also known as bankruptcy remote entities.

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.

ikoreaii

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.

ikoreaii

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

A) Corporate guarantee.

B) Both of these choices are external credit enhancements.

C) Bond insurance.

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Both of the choices are commonly used external credit enhancements.