"Fixed Income":Credit spread
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Questions 1:
Credit spreads are most likely to narrow during:
A 、economic contractions.
B、 a period of flight to quality.
C 、economic expansions.
Questions 2:
Which of the following is least likely a form of internal credit enhancement used in a securitization?
A、 Subordination
B 、Overcollateralization
C、 Letter of credit
C is correct. Credit spreads narrow during economic expansions and widen during economic contractions. During an economic expansion, corporate revenues and cash flows rise, making it easier for corporations to service their debt, and investors purchase corporates instead of Treasuries, causing spreads to narrow.
A is incorrect. Credit spreads narrow during economic expansions and widen during economic contractions.
B is incorrect. During a flight to quality investors sell corporate and buy treasuries thereby widening the credit spread on corporates.
C is correct. The use of letters of credit is a type of external credit enhancement used in a securitization.
A is incorrect because subordination is a type of internal credit enhancement used in a securitization.
B is incorrect because overcollateralization is a type of internal credit enhancement used in a securitization.
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