READING 50 FIXED-INCOME MARKETS FOR CORPORATE ISSUERS

Question 1

hich of the following best describes an uncommitted line of credit?
A. A line of credit with a fixed term and mandatory lending by the bank.
B. A flexible line of credit that can be withdrawn by the bank at any time.
C. A revolving credit line with long-term maturity.

Answer 1

Correct Answer: B

Explanation:

Correct: B is correct. An uncommitted line of credit is informal and can be revoked by the bank at any time.

A is incorrect because mandatory lending characterizes a committed line.

C is incorrect as revolving lines are typically longer-term and more formal.

Question 2

Which feature differentiates revolving credit lines from committed credit lines?
A. Revolving credit lines carry lower interest rates.
B. Revolving credit lines are shorter-term.
C. Revolving credit lines typically allow repeated borrowing and repayment over a longer period.

Answer 2

Correct Answer: C

Explanation:

Correct: C is correct. Revolving lines are reusable and often have medium- to long-term maturities.

A is incorrect because interest rates are usually similar.

B is incorrect since revolvers tend to be longer-term.

Question 2

What type of credit line requires banks to hold higher reserves due to potential default risk?
A. Uncommitted line of credit
B. Committed line of credit
C. Factored receivables

Answer 2

Correct Answer: B

Explanation:

Correct: B is correct. Committed lines require regulatory reserve backing.

A is incorrect since uncommitted lines are informal and do not require reserve holding.

C is incorrect because factoring is not a line of credit.

Question 3

Which type of loan typically requires collateral for firms with weaker credit ratings?
A. Commercial paper
B. Secured loan
C. Committed credit line

Answer 3

Correct Answer: B

Explanation:

Correct: B is correct. Secured loans are backed by assets.

A is incorrect because CP is unsecured and available to high-credit firms.

C is incorrect since a committed line may be unsecured for strong credit firms.

Question 4

What does factoring involve in terms of receivables?
A. Using receivables as collateral for a loan.
B. Selling receivables at face value.
C. Selling receivables at a discount to a third party.

Answer 4

Correct Answer: C

Explanation:

Correct: C is correct. Factoring is the outright sale of receivables at a discount.

A is incorrect because that’s a secured loan.

B is incorrect as the sale is done at a discount.

Question 5

Which of the following best describes the discount applied in factoring?
A. It is based on the creditworthiness of the factoring company.
B. It represents the bank’s operating cost.
C. It reflects customer credit quality and collection difficulty.

Answer 5

Correct Answer: C

Explanation:

Correct: C is correct. The discount reflects risk and collection cost.

A is incorrect; it depends on the customer’s credit.

B is incorrect because it reflects risk, not general operating cost.

Question 6

What type of short-term funding instrument is most appropriate for a highly rated large corporation?
A. Secured bank loan
B. Commercial paper
C. Factoring

Answer 6

Correct Answer: B

Explanation:

Correct: B is correct. CP is suitable for strong credit firms.

A is incorrect because CP is cheaper and unsecured.

C is incorrect; factoring is used when firms need quick cash and cannot issue CP.

Question 7

Which characteristic defines commercial paper (CP)?
A. Long-term maturity and collateral backing.
B. Short-term, unsecured, and issued at discount.
C. Issued by banks for short-term lending.

Answer 7

Correct Answer: B

Explanation:

Correct: B is correct. CP is short-term, unsecured, and typically issued at a discount.

A is incorrect; CP is not long-term.

C is incorrect; CP is issued by corporations, not banks.

Question 8

Rollover risk in CP arises when:
A. A firm cannot meet debt covenants.
B. A firm cannot issue new CP to repay maturing CP.
C. A firm defaults on a long-term bond.

Answer 8

Correct Answer: B

Explanation:

Correct: B is correct. Rollover risk occurs if new CP can’t be sold to replace old ones.

A is incorrect; it relates to covenant risk.

C is incorrect as that’s a long-term issue.

Question 9

What is the purpose of a backup line of credit in commercial paper issuance?
A. To reduce interest cost of CP.
B. To provide a permanent source of funding.
C. To provide liquidity if rollover risk materializes.

Answer 9

Correct Answer: C

Explanation:

Correct: C is correct. Backup lines serve as a safety net for maturing CP.

A is incorrect because interest costs are market-driven.

B is incorrect since it’s temporary, not permanent.

Question 10

What is bridge financing used for?
A. To acquire long-term assets.
B. As a permanent capital source.
C. As temporary funding before long-term funding is arranged.

Answer 10

Correct Answer: C

Explanation:

Correct: C is correct. Bridge financing is temporary.

A is incorrect because it’s short-term.

B is incorrect as it’s temporary, not permanent.

Question 11

Which of the following best explains why a firm may choose CP over a bank loan?
A. CP is secured and offers tax advantages.
B. CP is typically cheaper for firms with good credit.
C. CP is available to all firms regardless of credit rating.

Answer 11

Correct Answer: B

Explanation:

Correct: B is correct. CP offers lower cost for strong firms.

A is incorrect; CP is unsecured.

C is incorrect; CP is limited to high-credit firms.

Question 12

Which fee is typically associated with committed lines of credit?
A. Factoring fee
B. Commitment fee
C. Origination fee

Answer 12

Correct Answer: B

Explanation:

Correct: B is correct. Banks charge a commitment fee.

A is incorrect; it’s for factoring.

C is not typically associated with committed lines.

Question 13

Which of the following accurately describes secured loans?
A. They are loans backed by the borrower’s reputation.
B. They are backed by pledged assets like inventory.
C. They are typically used by investment-grade firms.

Answer 13

Correct Answer: B

Explanation:

Correct: B is correct. Secured loans use assets as collateral.

A is incorrect; that would be unsecured.

C is incorrect; they’re often used by firms with weaker credit.

Question 14

Eurocommercial paper (ECP) differs from U.S. CP in that it:
A. Has longer maturities.
B. Is more liquid.
C. Is less liquid and international.

Answer 14

Correct Answer: C

Explanation:

Correct: C is correct. ECP is smaller and less liquid.

A is incorrect; maturity is similar.

B is incorrect; ECP is less liquid.

Question 15

What makes revolving credit lines more reliable for operating financing?
A. Lower fees
B. Unrestricted use of funds
C. Longer terms and commitment by banks

Answer 15

Correct Answer: C

Explanation:

Correct: C is correct. Revolvers are committed for longer terms.

A is incorrect; fees are similar.

B is incorrect; covenants often restrict use.

Question 16

What is the typical maturity range for Commercial Paper?
A. Less than 270 days
B. 1 to 3 years
C. 6 months to 5 years

Answer 16

Correct Answer: A

Explanation:

Correct: A is correct. CP usually matures in less than 270 days.

B and C are incorrect; those are long-term durations.

Question 17

Which of the following credit lines involves syndication to reduce risk?
A. Uncommitted line
B. Committed line
C. Factored receivables

Answer 17

Correct Answer: B

Explanation:

Correct: B is correct. Banks may syndicate committed lines.

A is incorrect; uncommitted lines don’t need syndication.

C is incorrect; factoring doesn’t involve syndication.

Question 18

The interest rate on an uncommitted line of credit is generally:
A. A fixed rate unrelated to market movements.
B. A floating rate based on MRR plus a spread.
C. The same as the central bank’s policy rate.

Answer 18

Correct Answer: B

Explanation:

Correct: B is correct. It’s based on MRR plus a spread.

A is incorrect; it’s floating, not fixed.

C is incorrect; central bank rate is a reference but not directly applied.

Question 19

Why might a firm prefer factoring over secured lending?
A. To increase credit rating
B. To transfer the burden of collection and credit risk
C. To obtain long-term funding

Answer 19

Correct Answer: B

Explanation:

Correct: B is correct. Factoring transfers collection responsibility and risk.

A is incorrect; factoring doesn’t affect rating positively.

C is incorrect; factoring is short-term.

Question 20

Which of the following is a primary characteristic of checking accounts (demand deposits) held by banks?
A. They typically pay a fixed interest rate.
B. They provide immediate availability of funds but typically pay no interest.
C. They have a stated term with penalties for early withdrawal.

Answer 20

Correct Answer: B

Explanation:

Checking accounts provide transaction services with immediate access to funds but usually do not pay interest.

Option A is incorrect because checking accounts usually do not pay interest.

Option C describes savings deposits or CDs, not checking accounts.

Question 21

Operational deposits differ from retail deposits primarily because they:
A. Are made by individual consumers for daily transactions.
B. Are made by large customers who require cash management and clearing services.
C. Cannot be withdrawn before maturity without penalty.

Answer 21

Correct Answer: B

Explanation:

Operational deposits are typically from large clients needing specialized services like custody and cash management.

Option A describes retail deposits.

Option C refers to certain savings deposits or CDs.

Question 22

A nonnegotiable certificate of deposit (CD) is characterized by:
A. The ability to be sold in the open market before maturity.
B. A fixed term and interest rate with penalties for early withdrawal.
C. Immediate liquidity with no interest paid.

Answer 22

Correct Answer: B

Explanation:

Nonnegotiable CDs cannot be sold before maturity, and early withdrawals incur penalties.

Option A describes negotiable CDs.

Option C describes checking accounts.

Question 23

Negotiable CDs are important for banks because they:
A. Are typically sold to retail customers only.
B. Can be traded in the secondary market, providing early withdrawal options.
C. Pay no interest and cannot be transferred.

Answer 23

Correct Answer: B

Explanation:

Negotiable CDs can be sold before maturity in bond markets, aiding bank liquidity.

Option A is false as they are mainly used by institutional investors.

Option C contradicts negotiable CDs’ features.

Question 24

Interbank funds are best described as: A. Deposits made by retail customers to banks. B. Loans between banks, ranging from overnight to one year. C. Long-term loans issued by banks to corporations.

Answer 24

Correct Answer: B Explanation: Interbank funds involve banks lending to each other for short periods. Option A describes retail deposits. Option C describes corporate lending, not interbank.

Question 25

Which of the following is a common type of secured interbank borrowing? A. Commercial paper issuance B. Repurchase agreements (repos) C. Negotiable CDs

Answer 25

Correct Answer: B Explanation: Repurchase agreements are secured interbank loans. Option A is a funding source but not secured interbank borrowing. Option C are deposit instruments, not interbank loans.

Question 26

The market reference rate (MRR) used in interbank lending is important because it: A. Represents a high-risk benchmark for corporate loans. B. Serves as a low credit risk baseline for other interest payments. C. Is unrelated to the coupon rates on floating rate notes (FRNs).

Answer 26

Correct Answer: B Explanation: MRR reflects low-risk short-term rates used as a base for riskier loan pricing. Option A is incorrect; MRR is low risk. Option C is incorrect since FRN coupons are often tied to MRR plus a margin.

Question 27

The Secured Overnight Funding Rate (SOFR) in the U.S. is an example of a(n): A. Interbank market reference rate (MRR) B. Corporate bond yield C. Retail deposit rate

Answer 27

Correct Answer: A Explanation: SOFR is an example of an interbank overnight secured funding rate. Option B refers to corporate yields, not MRR. Option C relates to deposit products.

Question 28

What role does the central bank funds market play in short-term bank funding? A. It allows banks to lend excess reserves to other banks in need of reserves. B. It provides long-term capital loans to banks. C. It exclusively facilitates retail savings deposits.

Answer 28

Correct Answer: A Explanation: The central bank funds market is for short-term lending of reserves between banks. Option B is incorrect because loans here are short term. Option C describes deposit markets, not central bank funds.

Question 29

“Discount window lending” by the central bank refers to: A. Central bank acting as lender of last resort to banks needing liquidity. B. Banks discounting commercial paper in the open market. C. Central bank selling government bonds to commercial banks.

Answer 29

Correct Answer: A Explanation: Discount window lending provides emergency liquidity at higher rates. Option B describes commercial paper markets. Option C refers to open market operations, not discount window.

Question 30

Compared to nonfinancial companies, financial institutions: A. Issue less commercial paper overall. B. Issue more commercial paper overall. C. Do not issue commercial paper.

Answer 30

Correct Answer: B Explanation: Financial institutions are major issuers of commercial paper. Option A and C are incorrect as they understate the role of financial institutions.

Question 31

Asset-backed commercial paper (ABCP) is: A. A type of unsecured commercial paper issued by banks. B. A short-term security backed by specific financial assets transferred to an SPE. C. A long-term bond issued by financial institutions.

Answer 31

Correct Answer: B Explanation: ABCP is secured by collateral assets via an SPE and is short term. Option A ignores the asset backing. Option C misclassifies ABCP’s term and nature.

Question 32

What is the purpose of transferring collateral assets to a special purpose entity (SPE) in ABCP issuance? A. To consolidate assets on the financial institution’s balance sheet. B. To isolate risk and raise cash through off-balance-sheet financing. C. To provide retail investors with loan products.

Answer 32

Correct Answer: B Explanation: Transferring assets to an SPE isolates risk and allows off-balance-sheet funding. Option A is incorrect — assets move off balance sheet. Option C misinterprets the investor base.

Question 33

In the ABCP structure, the sponsoring financial institution’s backup credit liquidity line: A. Guarantees repayment of ABCP if collateral cash flows fall short. B. Transfers all risk to investors with no backup. C. Is unrelated to liquidity support.

Answer 33

Correct Answer: A Explanation: The backup credit line ensures liquidity support for the SPE in case of shortfalls. Option B is false as the sponsor provides credit support. Option C ignores this key support feature.

Question 34

Which of the following statements about interbank funds markets is TRUE? A. Loans between banks are always unsecured. B. Interest rates on interbank loans are linked to market reference rates. C. Banks do not lend reserves to each other in these markets.

Answer 34

Correct Answer: B Explanation: Interbank loans are priced based on market reference rates (MRRs), such as SOFR, which are closely linked to and influenced by the central bank’s policy (funds) rate. This ensures short-term funding rates reflect both monetary policy and market liquidity conditions. Option A is false because interbank loans can be either secured (e.g., repos) or unsecured. Option C is false because banks actively lend reserves to each other in the central bank funds market, which determines the central bank funds rate.

Question 35

A repurchase agreement (repo) is best described as: A. An outright sale of a security with a commitment to buy it back at a later date at a prespecified higher price. B. A loan collateralized by a security, where the security seller commits to repurchase it from the buyer. C. A short-term unsecured loan between two parties.

Answer 35

Correct Answer: B Explanation: B is correct. A repo is fundamentally a collateralized loan. The security seller (borrower) receives cash (loan amount) from the security buyer (lender) and simultaneously agrees to repurchase the security at a later date for a higher price. The security acts as collateral. A is incorrect. While it involves a "buy back," the core nature is a collateralized loan, not just an outright sale and then repurchase. The security serves as collateral for the initial cash transfer. C is incorrect. Repos are secured loans, not unsecured, as they are collateralized by securities.

Question 36

In a repurchase agreement, the difference between the security's original sale price and its repurchase price is known as the: A. Haircut. B. Repo rate. C. Variation margin.

Answer 36

Correct Answer: B Explanation: B is correct. The difference between the initial sale price and the repurchase price, annualized and expressed as a percentage of the initial sale price, represents the implicit interest rate of the repo, which is the repo rate. A is incorrect. A haircut is a discount applied to the market value of securities to determine the loan amount, acting as a buffer against collateral value declines. C is incorrect. Variation margin refers to additional collateral requested when the market value of the posted collateral falls below a certain threshold.

Question 37

An overnight repo refers to a repo agreement with a term: A. Of one day. B. Longer than one year. C. Between one week and one month.

Answer 37

Correct Answer: A Explanation: Overnight repos last one day. Options B and C are incorrect as they refer to longer-term repos.

Question 38

Which of the following is NOT a typical use of repurchase agreements? A. Financing securities positions in trading activities. B. Lending excess short-term funds to earn the repo rate. C. Raising long-term equity capital for expansion projects.

Answer 38

Correct Answer: C Explanation: Repos are short-term funding tools, not used for long-term equity financing. Options A and B are common uses of repos.

Question 39

Central banks use repos primarily to: A. Fund commercial banks directly. B. Influence the money supply through monetary policy operations. C. Issue long-term government bonds.

Answer 39

Correct Answer: B Explanation: Central banks buy or sell securities in repos to manage money supply. Option A is incorrect as direct funding is not their primary use of repos. Option C is unrelated to repo operations.

Question 40

In a reverse repo, the participant is: A. Borrowing cash and lending securities. B. Borrowing securities and lending cash. C. Selling securities with no repurchase agreement.

Answer 40

Correct Answer: B Explanation: A reverse repo means lending cash to borrow securities, often used by short sellers. Option A describes a normal repo. Option C describes a sale without repurchase.

Question 41

A short seller enters a repo to borrow securities because: A. They expect the price of the securities to increase. B. They want to earn the coupon payments. C. They expect the price of the securities to decrease.

Answer 41

Correct Answer: C Explanation: Short sellers borrow securities to sell them, hoping to buy them back cheaper. Option A is the opposite of short selling motivation. Option B is incorrect since short sellers lose coupon benefits.

Question 42

When a security is difficult to borrow, the repo rate offered to the borrower is generally: A. Higher than on general collateral. B. Lower than on general collateral. C. The same as on general collateral.

Answer 42

Correct Answer: B Explanation: Borrowers accept lower or even negative repo rates to secure hard-to-borrow securities. Option A is incorrect as the lender is in demand and will accept lower rates. Option C ignores scarcity pricing.

Question 43

Which factor generally leads to a lower repo rate? A. Longer repo term. B. High credit quality of collateral. C. Undercollateralization of the loan.

Answer 43

Correct Answer: B Explanation: High-quality collateral reduces risk and lowers the repo rate. Option A typically increases repo rate. Option C increases repo rate due to higher risk.

Question 44

If the collateral security is in high demand or low supply, the repo rate is likely to: A. Increase. B. Decrease. C. Remain unchanged.

Answer 44

Correct Answer: B Explanation: Scarcity of collateral lowers the repo rate because lenders compete to lend those securities. Option A is incorrect as scarcity reduces rates. Option C ignores market forces.

Question 45

Margining risk in repo agreements relates to: A. The borrower's ability to repurchase the security. B. The timely and accurate calculation and payment of additional collateral. C. The legal enforceability of the repo contract.

Answer 45

Correct Answer: B Explanation: Margining risk arises from managing margin calls to maintain adequate collateral. Option A is default risk. Option C is legal risk.

Question 46

Legal risk in repos refers to: A. The risk that collateral value decreases. B. The risk that contracts are unenforceable. C. The risk of incorrect margin calculations.

Answer 46

Correct Answer: B Explanation: Legal risk involves whether courts will uphold repo agreements. Option A is collateral risk. Option C is margining risk.

Question 47

A bilateral repo differs from a tri-party repo because: A. It involves a third-party agent to manage collateral. B. It is conducted directly between two parties without an intermediary. C. It only uses government securities as collateral.

Answer 47

Correct Answer: B Explanation: Bilateral repos are direct agreements without third-party agents. Option A describes tri-party repos. Option C is unrelated to bilateral vs tri-party distinction.

Question 48

Which of the following risks is specifically addressed by tri-party repos? A. Credit risk. B. Operational risk related to collateral safekeeping. C. Market risk of collateral price fluctuations.

Answer 48

Correct Answer: B Explanation: Tri-party repos improve operational efficiency and collateral management. Option A (credit risk) remains unchanged. Option C is inherent and not eliminated by tri-party structure.

Question 49

If a repo is undercollateralized, the repo rate is generally: A. Lower due to lower risk. B. Higher due to increased risk. C. Unaffected by collateral levels.

Answer 49

Correct Answer: B Explanation: Less collateral means more risk, raising the cost of borrowing. Option A is incorrect. Option C ignores risk pricing.

Question 50

What is the primary benefit of repos for security buyers/lenders? A. To gain voting rights on securities. B. To earn interest (repo rate) on short-term excess funds. C. To permanently acquire securities at a discount.

Answer 50

Correct Answer: B Explanation: Buyers/lenders earn the repo rate by lending cash collateralized by securities. Option A is incorrect as ownership is temporary. Option C contradicts the repo structure.

Question 51

Which statement best describes the "master repurchase agreement"? A. A short-term agreement for a single transaction. B. A legal contract outlining terms for multiple repo transactions between counterparties. C. An agreement specific to overnight repos only.

Answer 51

Correct Answer: B Explanation: It governs all repos between the parties, standardizing terms. Options A and C are too narrow.

Question 52

Why are repo interest rates usually lower than rates on bank loans? A. Because repos are unsecured. B. Because repos are short-term and collateralized by high-quality securities. C. Because repos have no default risk.

Answer 52

Correct Answer: B Explanation: Collateral and short duration lower risk, thus lower rates. Option A is false; repos are secured. Option C is false; default risk exists but is lower.

Question 53

What is the main consequence of overusing repos by a borrower? A. Increased liquidity and financial strength. B. Financial distress or insolvency due to excessive debt. C. Decreased credit risk for lenders.

Answer 53

Correct Answer: B Explanation: Over-reliance on repos can strain finances and cause insolvency. Option A is opposite of the risk. Option C is unrelated.

Question 54

Netting and settlement risk in repos refers to: A. The inability to legally enforce contracts. B. Challenges in combining and settling payments and collateral deliveries across contracts. C. Risks related to changes in collateral market value.

Answer 54

Correct Answer: B Explanation: Netting risk deals with operational ability to offset payments and collateral deliveries. Option A is legal risk. Option C is collateral risk.

Question 55

In a normal yield curve environment, which of the following best explains why long-term bond yields are higher? A. Lower inflation expectations B. Higher liquidity in the short-term bond market C. Increased risk premium for longer maturities

Answer 55

Correct Answer: C Explanation: Yields are higher for longer maturities due to higher risk-free rates and credit spreads, reflecting the greater uncertainty over time. A is incorrect – Lower inflation expectations would reduce yields, not raise them. B is incorrect – While short-term bonds may be more liquid, this doesn’t explain the upward slope of the yield curve.

Question 56

Which of the following best explains the greater difference in yield across maturities for high-yield issuers compared to investment-grade issuers? A. Lower coupon rates B. Higher credit spreads C. Greater issue standardization

Answer 56

Correct Answer: B Explanation: High-yield issuers face greater credit risk, so spreads are wider over longer maturities, increasing the yield difference. A is incorrect – High-yield bonds typically offer higher coupon rates, not lower. C is incorrect – Standardization reduces risk but is more typical for investment-grade, not high-yield.

Question 57

A company chooses to issue short-term bonds to avoid high long-term yields. This exposes the company primarily to: A. Liquidity risk B. Rollover risk C. Default risk

Answer 57

Correct Answer: B Explanation: Rollover risk occurs when firms depend on refinancing short-term debt at maturity. A is incorrect – Liquidity risk relates to buying/selling bonds in the market. C is incorrect – Default risk is always present but not specific to short-term issuance decisions.

Question 58

Which of the following is the primary credit-related concern for high-yield bond investors? A. Ratings downgrade B. Loss given default C. Inflation risk

Answer 58

Correct Answer: B Explanation: High-yield investors worry more about default and how much they might lose if it happens. A is incorrect – Ratings downgrades are more relevant to investment-grade investors. C is incorrect – Inflation affects all bonds, not specifically high-yield ones.

Question 59

Investment-grade investors are most concerned with: A. Issuer’s ability to secure collateral B. Changes in benchmark rates C. Ratings downgrade and future default probability

Answer 59

Correct Answer: C Explanation: They focus on credit deterioration over time, not immediate default. A is incorrect – Collateral is more relevant in high-yield markets. B is incorrect – Though benchmark rates influence yield, they are not credit-related concerns.

Question 60

Which best characterizes the credit spreads on investment-grade bonds? A. Large proportion of total yield B. Tied mostly to economic growth C. Small portion of yield, as they follow benchmark rates

Answer 60

Correct Answer: C Explanation: Investment-grade yields closely follow risk-free benchmark rates with small additional spreads. A is incorrect – High-yield bonds have larger credit spread portions. B is incorrect – Economic growth impacts spreads indirectly, but this is not the defining feature.

Question 61

Compared to high-yield bonds, investment-grade bonds generally have: A. Higher prepayment risk B. More restrictive covenants C. Fewer restrictive covenant

Answer 61

Correct Answer: C Explanation: Investment-grade issuers are trusted more and face fewer rules, like limitations on liens or sale-leasebacks. A is incorrect – High-yield bonds often have call features (and thus more prepayment risk). B is incorrect – High-yield bonds have more covenants to protect investors.

Question 62

Which of the following is more common for high-yield issuers than for investment-grade issuers? A. Bullet maturities B. Collateralized bond structures C. Use of benchmark rates

Answer 62

Correct Answer: B Explanation: High-yield issuers often need to offer collateral to attract investors. A is incorrect – Bullet maturities (single payment at maturity) are common to both. C is incorrect – Investment-grade bonds track benchmark rates more closely.

Question 63

Which statement best explains why investment-grade bonds reduce rollover risk? A. They are issued with balloon payments. B. They are often issued across multiple maturities. C. They are tied to LIBOR or SOFR rates.

Answer 63

Correct Answer: B Explanation: Issuing bonds with staggered maturities spreads out repayment obligations. A is incorrect – Balloon payments concentrate risk. C is incorrect – Reference rates affect pricing, not rollover structure.

Question 64

High-yield debt is often less standardized than investment-grade debt primarily due to: A. Use of government benchmarks B. Greater number of specific covenants and liens C. Longer maturity structures

Answer 64

Correct Answer: B Explanation: Each high-yield deal can have unique protections and terms, reducing standardization. A is incorrect – Government benchmarks are mostly used in investment-grade bonds. C is incorrect – High-yield bonds typically have shorter maturities.

Question 65

Which of the following most limits a high-yield issuer’s ability to refinance debt when rates fall? A. Fixed coupon payments B. Shorter maturities C. Less standardization and fewer refinancing options

Answer 65

Correct Answer: C Explanation: Less flexibility in terms, and non-standard structures, reduce refinancing opportunities. A is incorrect – Fixed coupons don’t prevent refinancing. B is incorrect – Short maturities increase rollover risk but not necessarily limit refinancing directly.

Question 66

Callable bonds and leveraged loans with prepayment options are primarily used by: A. Sovereign debt issuers B. Investment-grade companies C. High-yield issuers

Answer 66

Correct Answer: C Explanation: High-yield issuers use these to refinance if their credit improves. A is incorrect – Sovereign bonds rarely have these features. B is incorrect – Investment-grade companies usually don’t need such flexibility.

Question 67

The return profile of high-yield debt most resembles which of the following asset classes? A. Treasury bills B. Equity securities C. Mortgage-backed securities

Answer 67

Correct Answer: B Explanation: Because of higher risk and return variability, high-yield debt behaves like equities. A is incorrect – Treasury bills are low-risk, low-return. C is incorrect – MBS have different risk characteristics (e.g., prepayment risk).

Question 68

A company issues 5-year callable bonds with high coupon rates and collateral backing. What type of issuer is this most likely to be? A. Investment-grade B. Government C. High-yield

Answer 68

Correct Answer: C Explanation: High coupon + call option + collateral = typical structure for high-yield issuers. A is incorrect – Investment-grade issuers don’t usually need to secure debt or pay high coupons. B is incorrect – Governments don’t offer callable, collateral-backed bonds in this way.

Question 69

Which feature is least likely to be associated with investment-grade debt? A. Use of multiple maturities B. Heavy collateral requirements C. Limited restrictive covenants

Answer 69

Correct Answer: B Explanation: Investment-grade debt is rarely secured by collateral. A is incorrect – Investment-grade bonds are often issued across many maturities. C is incorrect – These bonds typically have fewer restrictive rules.