M04 – FI Corporate Issuers: CFAI Practice Problems


Question 1

A commercial bank pools a group of automobile loans and sells securities backed by the cash flows from those loans. The most likely benefit of this securitization process to the bank is:

  • A. Increasing the bank’s regulatory capital requirements
  • B. Removing the loans from the bank’s balance sheet, freeing up capital for new lending
  • C. Raising the interest rates charged to the automobile loan borrowers

Question 2

A corporation has established a credit facility with its bank. Under this arrangement, the bank has the right to refuse any drawdown request at its discretion. This credit facility is best described as:

  • A. A revolving credit facility
  • B. An uncommitted line of credit
  • C. A committed line of credit

Question 3

A securities dealer enters into a repurchase agreement (repo) to sell a government bond at a price of $9,980,000, with an agreement to repurchase it in 30 days. The repo rate is 4.00% (annualized, 360-day basis). The repurchase price is closest to:

  • A. $9,993,267
  • B. $10,013,267
  • C. $10,033,200

Question 4

In a reverse repurchase agreement, the party initiating the transaction is most likely:

  • A. Lending cash and temporarily receiving securities as collateral
  • B. Borrowing cash and pledging securities as collateral
  • C. Selling securities outright with no obligation to repurchase

Question 5

A corporation with stable, predictable cash flows and an established credit history is considering whether to finance a major capital project with short-term commercial paper or long-term bonds. The corporation would most likely prefer long-term bond financing primarily because:

  • A. Short-term commercial paper always offers lower interest rates than long-term bonds
  • B. Long-term bonds eliminate the rollover risk associated with repeatedly refinancing short-term debt
  • C. Long-term bonds do not require credit ratings from rating agencies

Question 6

A company rated below investment grade (high-yield) needs to raise capital. Compared to an investment-grade issuer, this company is most likely to face which of the following challenges in its financing approach?

  • A. Greater ability to issue unsecured bonds at favorable terms
  • B. Greater reliance on secured debt or bank loans with restrictive covenants
  • C. Lower borrowing costs due to higher demand from yield-seeking investors