Fran
Administrator
AIMs: Describe securities with different types of credit risks, such as corporate debt, sovereign debt, credit derivatives, and structured products. Differentiate between book and market values for a firm’s capital structure. Identify and describe different debt seniorities and their respective collateral structure.
Questions:
300.1. Which of the following credit-risky securities, according to Malz, is the "only type that can default in the narrowest sense of the word"? (Source: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011))
a. Corporate debt
b. Sovereign debt
c. Credit derivatives
d. Structured products
300.2. In regard to a bank's balance sheet, each of the following is true EXCEPT:
a. The asset value of the firm is greater than its enterprise value by the value of its cash and cash equivalent assets
b. Market value is the carrying value but with depreciation and amortization added back; book value is price of the assets realized if they were liquidated
c. For a traditional commercial bank, except for cash and equivalents, the assets generally have longer maturities, and are less liquid, than its liabilities
d. The ratio of equity to assets, E/A, is called the equity ratio; the ratio of assets to equity, A/E, is called the leverage ratio
300.3. Recently hedge fund (Greenlight Capital) manager David Einhorn accused Apple ($AAPL), which holds more than $130 billion in cash (most of it offshore), of being a cash hoarder. His remedy was the proposal of a new security he dubbed "iPrefs." As Einhorn explained, an "iPref is a share of perpetual preferred stock. It has a face value of $50, and pays a dividend of $2 per year. What iPref holders should expect is to receive $0.50 a quarter in dividends, every quarter, forever." Consider the following two assertions about iPrefs, assuming they are typical non-cumulative perpetual preferred stock:
I. iPrefs are technically equity, not debt: failure to pay the iPref dividend will not constitute a default
II. IPrefs location in the capital structure is subordinate to debt but superior to common equity: preferred stock bears losses before the bonds but after common equity is wiped out.
Which of the above is (are) true?
a. Neither
b. I. only
c. II. only
d. Both are true
Answers:
Questions:
300.1. Which of the following credit-risky securities, according to Malz, is the "only type that can default in the narrowest sense of the word"? (Source: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011))
a. Corporate debt
b. Sovereign debt
c. Credit derivatives
d. Structured products
300.2. In regard to a bank's balance sheet, each of the following is true EXCEPT:
a. The asset value of the firm is greater than its enterprise value by the value of its cash and cash equivalent assets
b. Market value is the carrying value but with depreciation and amortization added back; book value is price of the assets realized if they were liquidated
c. For a traditional commercial bank, except for cash and equivalents, the assets generally have longer maturities, and are less liquid, than its liabilities
d. The ratio of equity to assets, E/A, is called the equity ratio; the ratio of assets to equity, A/E, is called the leverage ratio
300.3. Recently hedge fund (Greenlight Capital) manager David Einhorn accused Apple ($AAPL), which holds more than $130 billion in cash (most of it offshore), of being a cash hoarder. His remedy was the proposal of a new security he dubbed "iPrefs." As Einhorn explained, an "iPref is a share of perpetual preferred stock. It has a face value of $50, and pays a dividend of $2 per year. What iPref holders should expect is to receive $0.50 a quarter in dividends, every quarter, forever." Consider the following two assertions about iPrefs, assuming they are typical non-cumulative perpetual preferred stock:
I. iPrefs are technically equity, not debt: failure to pay the iPref dividend will not constitute a default
II. IPrefs location in the capital structure is subordinate to debt but superior to common equity: preferred stock bears losses before the bonds but after common equity is wiped out.
Which of the above is (are) true?
a. Neither
b. I. only
c. II. only
d. Both are true
Answers:
