CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which statement is true?
A. There is no credit risk in bonds issued by governments.
B. A debenture bond is not secured by a specific pledge of property.
C. Covered bonds usually carry lower credit risks than otherwise similar securitized bonds.
Explanation: A is false. All bondholders are exposed to credit risk. They may use bond credit ratings to assess the credit quality of a bond.

B is false. In the U.K. and other Commonwealth countries, debentures are usually backed by an asset or a pool of assets.

C is true. Covered bonds usually carry lower credit risks than otherwise similar securitized bonds because issuers must ensure that the pool consistently backs up the covered bond. In the event of default, the investor has recourse to both the pool and the issuer.

User Contributed Comments 3

User Comment
lighty0770 investopedia debentures definition: a debenture is a type of debt instrument that is not secured by physical assets or collateral.

Also, the CFA is based on US standards so really dont like this explanation for why B is incorrect.
hankle The definition of a debenture - an UNSECURED - bond. How can we trust these questions? Taught in every undergrad finance class and a simple google search away.
maomao @hankle: The answer clearly says in the UK it is secured. According to wiki (https://en.wikipedia.org/wiki/Debenture): in the United Kingdom a debenture is usually secured. In Canada, a debenture refers to a secured loan instrument where security is generally over the debtor's credit, but security is not pledged to specific assets.
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