Question

QUESTION 1

1. I. DEBT INSTRUMENTS

   GROUP A

   Municipal - General Obligation bonds

   Municipal – Special Revenue bonds

   Credit Card Asset Backed Securities

   Corporate Lines of Credit – revolving loans

   Residential Mortgage Backed Securities

   Investment Grade Bonds – unsecured

   GROUP B

   Leveraged Loans

   Non-Investment Grade Bonds – unsecured

   Secured Bonds – Equipment Trust Certificates - airlines

   1. Select four (4) of the security types above, two (2) from Group A, two (2) from group B. For each security type, explain how it was impacted by the recent economic downturn. In your answer for each security, mention two (2) risks from the following list…interest rate risk, credit risk, options risk, and liquidity risk.

   Note: Only a few sentences are needed are necessary for each of the four (4) security types selected. In the words,

   (a) name the 2 risks,

   (b) explain why the 2 risks apply, and

   (c) explain what the recent economic downturn might mean for the price of securities in that security type.

   2. For one (1) of the riskier debt security types in Group B,

   a. list two covenants you would want to have in the bond indenture and

   b. explain why you chose those indentures, given recent events.

Answer 1

Impact of recent economic downturn on following securities as follows:

1. Municipal general obligations bonds: strain on municipal revenue, increased expenditure in emergency healthcare, closing of businesses and higher unemployment.

2. Credit card asset backed securities: interest rates are low, risk is not in credit quality, and loan portfolio quality has deteriorated.

3. Equipment trust certificates airlines: downgrading of the ratings has taken place.

4. Leveraged loans: liquidity needs, lowering interest rates and business interruptions.