Question

1. Asset based lending is commonly used to finance leveraged buyouts. Which of the following is not true about such financing?

1. The borrower generally pledges tangible assets as collateral.
2. Lenders look at the target firm’s assets as their primary protection.
3. Bank loans are secured frequently by receivables and inventory.
4. Loans maturing in more than one year are often referred to as term loans.
5. The target firm’s most liquid assets generally secure longer-term loans.

2. Security provisions and protective covenants are included in loan documents to increase the likelihood that the interest and principal of outstanding loans will be repaid in a timely fashion. Which of the following is not true about security provisions and protective covenants?

1. Security features include the assignment of payments due under a specific contract to the lender.
2. Negative covenants include limits on the amount of dividends that might be paid
3. Limitations on the amount of working capital that the borrower can maintain.
4. Periodically, financial statements must be sent to lenders.
5. Automatic loan repayment acceleration if the borrower is in default on any loans outstanding

3. Which of the following is not true about junk bonds?

1. Junk bonds are either unrated or rated below investment grade by the credit rating agencies
2. Typically yield about 1-2 percentage points below yields on U.S. Treasury debt of comparable maturities.
3. Junk bonds are commonly used source of “permanent” financing in LBO transactions
4. During recessions, junk bond default rates often exceed 10%
5. Junk bond default risk on non-investment grade bonds tends to increase the longer the elapsed time since the original issue date of the bonds

Answer 1

Solution :- 1 The Option (E) that The target firm’s most liquid assets generally secure longer-term loans. is appropiate answer

Means it is not correct about asset based lending.

All other Options except this are correct about asset based lending.

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