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 ...
the risk that a bonds creditworthiness declines is best described by
higher market liquidity risk
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CFA 56: Fundamentals Of Credit Analysis
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.
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