Deck 19: Markets for Corporate Senior Instruments: I

Question 1

Which of the below statements is FALSE?

A) Commercial paper is rated by the government.
B) Commercial paper can be directly placed by the issuer or issued by using the services of an agent or intermediary.
C) Other countries have developed their own commercial paper markets, and there is a Eurocommercial paper market.
D) By using credit support, smaller and less well-known companies with lower credit ratings have been able to issue paper.

Answer 1

A

Question 2

Which of the below statements is FALSE?

A) A corporation that wants an MTN program will file a shelf registration with the SEC for the offering of securities.
B) A unique characteristic of medium-term notes is that they are continuously offered to investors at a single point in time by an agent of the issuer.
C) MTNs created when the issuer simultaneously transacts in the derivative markets are called structured notes.
D) A structured note is a medium-term note in which the issuer couples its offering with a position in a derivative instrument in order to create instruments with more interesting risk/return characteristics.

Answer 2

B

Question 3

________ are subsidiaries of equipment manufacturing companies. Their primary purpose is to secure financing for the customers of the parent company.

A) Bank-related finance companies
B) Captive finance companies
C) Independent finance companies
D) Confined finance companies

Answer 3

B

Question 4

Traditionally credit risk is defined as the risk that the borrower will fail to satisfy the terms of the obligation with respect to the timely payment of interest and repayment of the amount borrowed. This form of credit risk is called ________.

A) spread risk.
B) market risk.
C) payment risk.
D) default risk.

Question 5

An improvement in the credit quality of an issue or issuer is rewarded with a better credit rating, referred to as ________; a deterioration in the credit quality of an issue or issuer is penalized by the assignment of an inferior credit rating, referred to as ________.

A) a downgrade; an upgrade
B) an upgrade; a downgrade
C) a quality improvement; a credit deterioration
D) a quality promotion; a credit demotion

Question 6

Which of the below statements is TRUE?

A) Short-term notes differ from corporate bonds in the manner in which they are distributed to investors when they are initially sold.
B) Long-term notes differ from corporate bonds in the manner in which they are distributed to investors when they are initially sold.
C) Medium-term notes differ from corporate bonds in the manner in which they are distributed to investors when they are initially sold.
D) All of these

Question 7

When the treasurer of a corporation is contemplating an offering of either MTNs or corporate bonds, a factor that affects the decision is ________.

A) the cost of the funds raised before consideration of registration and distribution costs.
B) the inflexibility afforded to the issuer in structuring the offering.
C) the cost of the funds raised after consideration of registration and distribution costs.
D) flexibility afforded to the investor in structuring the offering.

Question 8

________ may have a subsidiary that is a finance company, which provides loans to enable individuals and businesses to acquire a wide range of products.

A) Bank property companies
B) Captive finance companies
C) Bank holding companies
D) Independent finance companies

Question 9

Unlike corporate bonds, medium-term notes are typically issued on a ________ rather than underwritten by an investment banker.

A) competitive basis
B) best efforts basis
C) come-first basis
D) come-last basis

Question 10

Which of the below statements is FALSE?

A) Corporate debt obligations expose an investor to credit risk.
B) Credit risk consists of default risk, credit spread risk, and downgrade risk.
C) Corporate risk is typically measured by the credit or quality ratings assigned by nationally recognized commercial rating companies.
D) Commercial rating companies play a key role in the functioning of debt markets in the United States, and their role in other countries is increasing.

Question 11

Unlike investing in a U.S. Treasury security, an investor who lends funds to a corporation by purchasing its debt obligation is exposed to ________.

A) liquidity risk.
B) maturity risk.
C) credit risk.
D) nonmarket risk.

Question 12

Euro medium-term notes ________.

A) are issued by sovereign issuers (i.e., governments and governmental agencies) but not financial institutions.
B) are not issued by nonfinancial corporations.
C) have been issued in a variety of currencies and through the IPO market.
D) are those issued in the Euromarket.

Question 13

The commercial paper rate is higher than that on Treasury bills for the same maturity because ________.

A) the investor in Treasury bills is exposed to credit risk.
B) interest earned from investing in Treasury bills is exempt from state and local income taxes.
C) commercial paper is more liquid than Treasury bills.
D) the investor in commercial paper is exposed to less risk.

Question 14

A medium-term note (MTN) ________.

A) is a corporate debt instrument, with the unique characteristic that notes are offered continuously to investors by an agent of the issuer.
B) cannot be registered with the SEC under Rule 415 (the shelf registration rule).
C) was not traditionally used to refer to debt issues with a maturity greater than one year but less than 15 years.
D) have not been sold with maturities from nine months to 30 years, and even longer.

Question 15

Commercial paper is a ________ that is sold at a price that is less than its ________.

A) discount instrument; maturity value.
B) coupon instrument; maturity value.
C) discount instrument; premium value.
D) coupon instrument; premium value.

Question 16

Which of the below statements is FALSE?

A) Directly placed paper is sold by the issuing firm directly to investors without the help of an agent or an intermediary.
B) Dealer-placed commercial paper requires the services of an agent to sell an issuer's paper.
C) Eurocommercial paper is issued and placed outside the jurisdiction of the currency of denomination.
D) While an issuer in Europe must have unused bank credit lines, it is possible to issue commercial paper without such backing in the U.S. commercial paper market.

Question 17

Commercial paper ________.

A) is a long-term unsecured promissory note issued in the open market that represents the obligation of the issuing corporation.
B) is an alternative to bank borrowing for small firms with strong credit ratings.
C) has never been used quite often for bridge financing.
D) has very little secondary trading.

Question 18

The part of the risk premium or spread attributable to credit risk is called the ________.

A) credit spread.
B) risk spread.
C) premium spread.
D) investor spread.

Question 19

The popularity of MTNs as a financing vehicle is due to the ________.

A) flexibility they provide borrowers in designing a structure that satisfies the needs of firms.
B) fact they can be issued at either a fixed- or floating-rate.
C) fact the coupon payments can be denominated in U.S. dollars or in a foreign currency.
D) All of these

Question 20

________ are those that are not subsidiaries of equipment manufacturing firms or bank holding companies.

A) Bank holding companies
B) Dependent finance companies
C) Captive finance companies
D) Independent finance companies

Question 21

Commercial paper is a secured promissory note that is issued in the open market and that represents the obligation of the issuing corporation.

Question 22

In regards to a syndicated bank loan, which of the below statements is TRUE?

A) A syndicated loan is not arranged by either a bank or a securities house.
B) Each bank in the syndicate provides the funds for which it has committed.
C) The banks outside the syndicate have the right to sell their parts of the loan subsequently to other banks.
D) Syndicated loans are distributed by two methods: assignment or participation with each method having its relative advantages and disadvantages, with the method of participation the more desirable of the two.

Question 23

A syndicated bank loan is one in which a group of banks provides funds to the borrower, with the reference rate on the loan typically the New York Interbank Offered Rate.

Question 24

Sourcing alternatives for a corporation include ________.

A) a subsidiary of a domestic bank that has been established in a country where the corporation does business and a domestic bank in the corporation's home country.
B) a subsidiary of a foreign bank that is established in the corporation's home country and a domestic bank in the corporation's home country.
C) a foreign bank domiciled in a country where the corporation does business and a domestic bank in the corporation's home country.
D) All of these

Question 25

Senior loans cannot be distributed by participation.

Question 26

What is Eurocommerical paper? Describe two ways in which it differs from U.S. commercial paper.

Question 27

Once a rating is assigned to a corporate debt instrument, can it be changed? Explain.

Question 28

A structured note is a medium-term note in which the issuer couples its offering with a position in a derivative instrument in order to create instruments with more interesting risk/return characteristics.

Question 29

A unique characteristic of medium-term notes is that they are continuously offered to investors over a period of time by an agent of the issuer.

Question 30

Medium-term notes are not rated by the nationally recognized rating companies.

Question 31

Bank loans are an alternative to the issuance of securities.

Question 32

Commercial rating companies play a key role in the functioning of common stock markets in the United States, and their role in other countries is increasing.

Question 33

________ is one in which a group of banks provides funds to the borrower.

A) A bank fund loan
B) A group bank loan
C) A syndicated bank loan
D) An investment bank loan

Question 34

A tax-oriented lease effectively allows the lessee to obtain a financing at less cost than by bank borrowing.

Question 35

The market for lease financing is a segment of the larger market for ________.

A) equipment managing.
B) gear financing.
C) equipment financing.
D) None of these

Question 36

Credit risk consists of default risk, credit spread risk, and downgrade risk.

Question 37

Unlike an assignment, a participation ________, although the holder of the participation has the right to vote on certain legal matters concerning amendments to the loan agreement.

A) does not confer privity of contract on the holder of the participation
B) confers privity of contract on the holder of the participation
C) confers a legally recognized relationship between two parties
D) does not confer privity of contract on the holder of the involvement

Question 38

The Loan Syndications and Trading Association (LSTA) has helped foster the development of ________ for bank loans by establishing market practices and settlement and operational procedures.

A) an illiquid and opaque secondary market
B) a liquid and transparent primary market
C) an illiquid and opaque primary market
D) a liquid and transparent secondary market

Question 39

Which of the below statements is FALSE?

A) One possible way for the lessor to finance the purchase of the equipment is to provide all the financing from its own funds and therefore be at risk for 100% of the funds used to purchase the equipment.
B) One possible way for the lessor to finance the purchase of the equipment is for the lessor to use only a portion of its own funds to purchase the equipment, and to borrow the balance from a bank or group of banks.
C) Basically, leasing is a vehicle by which tax benefits can be transferred from the user of the equipment, who may not have the capacity to take advantage of the tax benefits associated with equipment ownership, to another entity who can utilize them.
D) There are only two parties to a leveraged lease agreement: the lessee and the lender.

Question 40

Commercial paper is an alternative to bank borrowing for small bank holding companies.

Question 41

There are two possible ways for the lessor to finance the purchase of the equipment. Describe these two ways.

Question 42

Describe a medium-term note. In your answer comment on its maturity and registration.

Question 43

There are three parties to a leveraged lease agreement. Name these three parties. What does the leveraged lease arrangement allow the lessor to realize?