CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

In assessing the credit risk of high-yield corporate bonds, an analyst should pay special attention to its ______.

I. debt structure
II. corporate structure
III. debt/equity ratio
IV. collateral
V. covenants
A. I, II and V
B. I, II, III, IV and V
C. I and II
Explanation: Other considerations include financial projections, liquidity, EV, etc.

User Contributed Comments 10

User Comment
mbuechs2 Why not III and IV?
Gedipudi Think high yield as junk bonds which means usually high debt or very little equity. so debt/equity is not very useful. ALSO, they may not have very many assets so collateral may not be a big deal.
danlan2 Gedipudi, good points.
osunks I dont know why C is not the answer. Why are covenants part of the deal.
volkovv Straight from the CFA book: "There are some unique factors that should be considered in the analysis of high-yield bonds: debt structure, corporate structure, covenants"
bmeisner I work for a credit shop and got this wrong. It's a very subjective question. The least accurate of the answers is debt/equity. No one looks at that measurement. The next least accurate is probably collateral because most high yield bonds are unsecured. That would leave the other 3 being more important. In real life you should consider all factors.
dblueroom doesnt corporate structure refer to the mix and debt and equity or that is something else (in coporate finance section)?
HectorRS2 I think is right as it asks for: should pay SPECIAL attention
malawyer very funny - don't know about you guys, but if my firm would lend in a speculative-debt situation, all of the above would be the short-short list - so much for theory ;-)
soorajiyer I actually got it this way:
1. Its a high yielding bond, which clearly means collateral is taken out of way.
2. Again its a high yielding bond, a junk bond and you are least bothered about its debt/equity ration.
3. You need the debt structure to know the seniority of your bonds.
4. Covenants are again very important for the high yielding bonds.
5. Being speculative bonds or near speculative bonds, corporate structure is also important.

Well I am not saying this is the way, but this way you do get it right most of the times (I think)!
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