CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statement is (are) true with respect to the issuance of asset-backed securities?

I. Issuing asset-backed securities can be viewed as a form of obtaining debt.
II. A special purpose vehicle is not a separate legal entity from a parent corporation.
III. If a company securitizes its assets, then only the cash flows generated from those assets will flow onto the investors.
IV. The credit rating on a special purpose vehicle cannot be higher than that of the company to which the assets originally belonged.
A. I and II
B. I and III
C. I, II and IV
Explanation: I is true. Issuing asset-backed securities can be viewed as a form of obtaining debt because companies are pledging some of their assets in return for receiving some proceeds. ABS differs from debt is that there is no fixed interest payment.

II is incorrect. A special purpose vehicle is a separate legal entity from a parent corporation.

IV is incorrect. The credit rating on a special purpose vehicle can be higher than that of the company to which the assets originally belonged. This is possible by enhancing the creditworthiness of the special purpose vehicle through various means (e.g., over-collateralizing the pool).

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