Reading 62: Overview of Bond Sectors and Instruments LOS i习 cell

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LOS i, (Part 1): Define an asset-backed security, and describe the role of a special purpose vehicle in an asset-backed security's transaction.

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 an asset backed security from creditors of the corporation that is securitizing the assets.

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

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

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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.

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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.

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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) Special purpose vehicles (SPVs).

B) Rating agencies.

C) Investment banks.

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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.

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

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

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

C) SPVs are used exclusively for asset backed transactions.

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

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LOS i, (Part 2): State the motivation for a corporation to issue an asset-backed security, and describe the types of external credit enhancements for asset-backed securities.

There are several types of external credit enhancements. All of the following are examples of external credit enhancements EXCEPT:

A) letters of credit.

B) setting aside reserve funds.

C) corporate guarantees.

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Setting aside reserve funds is an example of internal, not external credit enhancement.

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Which of the following statements concerning asset-backed securities (ABSs) is least accurate?

A) The asset-backed pool may be overcollateralized to provide a credit enhancement.

B) ABSs typically have lower debt ratings than the firm's other borrowings.

C) Typical assets to securitize are auto loans and credit card receivables.

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The objective of the firm with an ABS issue typically is to get a higher debt rating (a lower cost of borrowing). Typically, the ABS has a higher debt rating, perhaps because of credit enhancements

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A corporation may issue asset backed securities because:

A) it wants to change the structure of its balance sheet.

B) it wants to reduce the cost of borrowing.

C) both of the reasons are valid.

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Both of the reasons are valid.

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To reduce the cost of long-term borrowing, a corporation with a below average credit rating could:

A) decrease credit enhancement.

B) issue commercial paper.

C) issue asset backed securities.

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Commercial paper is a short-term promissory note. Decreasing credit enhancements increase the cost of borrowing.

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The issuance of asset backed securities (ABSs) versus straight debt would be desirable if:

A) a better credit quality is desired on the asset backed versus the corporation.

B) there are time constraints on the deal.

C) the corporation's credit rating may go up in the future.

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If there are time constraints, straight debt would be easier to issue. Also, if the corporation could be upgraded, it would benefit in straight debt but not its ABSs.