CFA Practice Question
Which of the following is a form of internal credit enhancement?
A. Senior/subordinate debt structures
B. A corporate guarantee or a letter of credit
C. MBIA municipal bond insurance or a municipal bond insurance "wrap"
Explanation: The senior/subordinate debt structure is an example of an internal credit enhancement. It is common for issuers of debt securities to employ means designed to enhance the credit rating of their debt. There are two general types of credit enhancement: internal and external. External credit enhancement usually comes in the form of bond insurance, a letter of credit, or a corporate guarantee. Internal credit enhancements are typically employed in a more complicated form, and include reserve funds, over-collateralization, and the senior/subordinate structure of debt securities. MBIA (Municipal Bond Insurance Association) is an insuring body that caters to the municipal bond market. Any form of bond insurance is frequently referred to as a "wrap."
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan | A is related to CMO |
| whoi | credit letter is "external funding" |
| eb2568 | LOL, MBIA insurance? i don't think that is as valuable today as it once was! but who knows, maybe that will change in the future. |
| Criticull | keeps the unsecured closer to junk and the secured around investment grade... |