The risk that a bond's creditworthiness declines is best described by:
credit migration risk.
market liquidity risk.
spread widening risk. Answer- A is correct. Credit migration risk or downgrade risk
refers to the risk that a bond issuer's creditworthiness may deteriorate or migrate lo...
the risk that a bondamp39s creditworthiness declines is best described by
spread widening risk
stedsmart ltd and fignermo ltd are alike with respect to fin
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CFA 56: Fundamentals of Credit Analysis
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CFA 56: Fundamentals of Credit Analysis
The risk that a bond's creditworthiness declines is best described by:
credit migration risk.
market liquidity risk.
spread widening risk. Answer- A is correct. Credit migration risk or downgrade risk
refers to the risk that a bond issuer's creditworthiness may deteriorate or migrate lower.
The result is that investors view the risk of default to be higher, causing the spread on
the issuer's bonds to widen.
Stedsmart Ltd and Fignermo Ltd are alike with respect to financial and operating
characteristics, except that Stedsmart Ltd has less publicly traded debt outstanding than
Fignermo Ltd. Therefore, Stedsmart Ltd is most likely to have:
no market liquidity risk.
lower market liquidity risk.
higher market liquidity risk. Answer- C is correct. Market liquidity risk refers to the risk
that the price at which investors transact may be different from the price indicated in the
market. Market liquidity risk is increased by (1) less debt outstanding and/or (2) a lower
issue credit rating. Because Stedsmart Ltd is comparable to Fignermo Ltd except for
less publicly traded debt outstanding, it should have higher market liquidity risk.
In the event of default, debentures' claims will most likely rank:
above that of secured debt holders.
below that of secured debt holders.
the same as that of secured debt holders. Answer- B is correct. Secured debt holders
have a direct claim on certain assets and their associated cash flows whereas
unsecured debt holders only have a general claim on the issuer's assets and cash flow.
In the event of default, the recovery rate of which of the following bonds would most
likely be the highest?
First mortgage debt
, Senior unsecured debt
Junior subordinate debt Answer- A is correct. First mortgage debt is the highest ranked
debt in terms of priority of claims and is considered secured debt. First mortgage debt
will also have the expected highest recovery rate. First mortgage debt refers to the
pledge of specific property. Neither senior unsecured nor junior subordinate debt has
any claims on specific assets.
During bankruptcy proceedings of a firm, the priority of claims was not strictly adhered
to. Which of the following is the least likely explanation for this outcome?
Senior creditors compromised.
The value of secured assets was less than the amount of the claims.
The judge's order resulted in actual claims not adhering to strict priority of claims.
Answer- B is correct. Whether or not secured assets are sufficient for the claims, this
would not influence priority of claims. The difference between pledge assets and the
claim becomes senior unsecured debt and still adheres to the guidelines of priority of
claims.
Although rating agencies assess the creditworthiness of debt issuers and issues, the
least likely reason that a fixed income analyst should conduct an independent analysis
of credit risk is because rating agencies:
may at times mis-rate issues.
often lag the market in pricing credit risk.
cannot foresee future debt-financed acquisitions. Answer- C is correct. Neither an
analyst nor ratings agencies can anticipate unexpected events.
Jaco Meyer, a credit analyst, is analyzing the human capital of a company. Such an
analysis will most likely give Meyer insight into the:
quality of the company's management.
strength of the company's balance sheet.
power of the company's customers. Answer- B is correct. An analysis of the human
capital of a company is the purpose of assessing the strength of its balance sheets or,
stated differently, the value and quality of assets supporting the issuer's indebtedness
(i.e., collateral).
If goodwill makes up a large percentage of a company's total assets, this most likely
indicates that:
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