1215

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.

1215

A corporation may issue asset backed securities because:

A) both of the reasons are valid.

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

C) it wants to reduce the cost of borrowing.

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Both of the reasons are valid.

1215

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

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

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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.

1215

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

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

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

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.

1215

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) Increase the chance of bankruptcy.

C) Cost.

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Credit enhancements increase the costs associated with borrowing using ABS.

1215

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) Special purpose vehicles (SPVs).

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.