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. 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. They shouldn’t.
4. None of the above.

3. Which of the following most closely related to the concept of “the interest rate?”

The coupon rate	The yield to maturity
The current yield	none of the above.

4. In the event of default, the recovery rate of which of the following bonds would most likely be the lowest

First Mortgage debt	Senior unsecured debt
Junior unsecured debt	none of the above.

Answer 1

1. Option A. Historically, mortgages have very low default rates

2. Option B It means the company will probably incur lots of debt to buy back its undervalued stock

3. The Yield to Maturity Option C

4. Option C. Junior Unsecured debt.