Question

1. Prior to the Financial Crisis, rating agencies mistakenly rated Mortgage Backed Securities (MBS) too high because:

1. Historically, mortgages have very low default rates.
2. The payments on the MBS’s were “insured” by credit default swaps.
3. The agencies didn’t account for the increase in sub-prime mortgages.
4. All of the above.

2. Fund from operations (FFO) of Pay Handle Ltd. Increased in 2011. In 2011 the total debt of the company remained unchanged, while additional common shares were issued. Pay Handle Ltd.’s ability to service its debt in 2011, as compared to 2010, most likely:

Improved	Worsened
Remained the same	Not enough information

3. Why should credit analysts be concerned if a company’s stock trades below book value?

1. It means the company is probably going bankrupt
2. It means the company will probably incur lots of debt to buy back its undervalued stock
3. It’s a signal that the company’s asset value on its balance sheet may be impaired, suggesting less collateral in the event of a bankruptcy
4. None of the above.

4. A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in twenty-one years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is:

98.65	101.36
106.41	none of the above.

Table 20.0 (for question 20).

Bond	Coupon Rate	Tenor	Price
UK Government Benchmark Bond	3%	10 years	77.68
UK Corporate Bond	2.92%	10 years	73.94

5. If the two bonds in Table 20.0 pay interest semiannually, the G-spread on the UK corporate bond is closest to:

51 bps	301 bps
176 bps	not enough information.

Answer 1

		Solution
		A	Prior to the Financial Crisis, rating agencies mistakenly rated Mortgage Backed Securities (MBS) too high because:
			Option A is coorect.
			a. Historically mortgages have very low default rates because it is most logical thing that any credit rating agency verify that its history of any company then after any other factors they verify
			Any other option available in above question is option A is correct.
		B	Fund from operations (FFO) of Pay Handle Ltd. Increased in 2011. In 2011 the total debt of the company remained unchanged, while additional common shares were issued. Pay Handle Ltd.’s ability to service its debt in 2011, as compared to 2010, most likely:
			Option A is coorect.
			The funds from operations (FFO) to total debt ratio is a leverage ratio that a credit rating agency or an investor can use to evaluate a company’s financial risk. The ratio is a metric comparing earnings from net operating income plus depreciation, amortization, deferred income taxes and other noncash items to long-term debt plus current maturities, commercial paper and other short-term loans.
			There is no Effect of change in amount of addition of share issued.
			The FFO to total debt ratio measures the ability of a company to pay off its debt using net operating income alone. The lower the FFO to total debt ratio, the more leveraged the company.
			Hence we can conclude that pay handle ltd position is improved
		C	Why should credit analysts be concerned if a company’s stock trades below book value?
			Option C is correct
			c. it’s a signal that the company’s asset value on its balance sheet may be impaired, suggesting less collateral in the event of a bankruptcy
		D	A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in twenty-one years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is:
			option c is correct
			As calculated below
		Future value	100
		Discounting rate	5.50%
	NO of year	Required rate	PV factors	Present value yearly
	1	5.5	0.952380952	5.238095
	2	5.5	0.907029478	4.988662
	3	5.5	0.863837599	4.751107
	4	5.5	0.822702475	4.524864
	5	5.5	0.783526166	4.309394
	6	5.5	0.746215397	4.104185
	7	5.5	0.71068133	3.908747
	8	5.5	0.676839362	3.722616
	9	5.5	0.644608916	3.545349
	10	5.5	0.613913254	3.376523
	11	5.5	0.584679289	3.215736
	12	5.5	0.556837418	3.062606
	13	5.5	0.530321351	2.916767
	14	5.5	0.505067953	2.777874
	15	5.5	0.481017098	2.645594
	16	5.5	0.458111522	2.519613
	17	5.5	0.436296688	2.399632
	18	5.5	0.415520655	2.285364
	19	5.5	0.395733957	2.176537
	20	5.5	0.376889483	2.072892
	21	105.5	0.358942365	37.86842
			Price of Bond	106.4106
		Question no. 20
			Option B is Correct
			Calculation is below
			Suppose 100 be nominal value assume this.
		Present value	Rate of interest
		100	2.92	2.92
		102.92	2.92	3.005264
			Effective rate	3.005264
			Approx 310 BPS