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Question 1 of 10
1. Question
All credit ratings are judgements based upon the analysis of variables that have an observable relationship to payment behaviour. Which among the following are the factors for higher credit quality?
I. A security with lower measures on positive credit indicators
II. Higher measures on negative credit indicators is less certain to pay
III. A security with high measures on variables positively associated with good credit performance
IV. Low measures on variables negatively associated with good credit performance
Correct
All credit ratings are judgements based upon the analysis of variables that have an observable relationship to payment behaviour. A security with high measures on variables positively associated with good credit performance (like the high liquidity ratio above) and low measures on variables negatively associated with good credit performance (like the low leverage ratio above) is more certain to pay and has a higher imputed credit quality. A security with lower measures on positive credit indicators and higher measures on negative credit indicators is less certain to pay and has lower imputed credit quality.
Incorrect
All credit ratings are judgements based upon the analysis of variables that have an observable relationship to payment behaviour. A security with high measures on variables positively associated with good credit performance (like the high liquidity ratio above) and low measures on variables negatively associated with good credit performance (like the low leverage ratio above) is more certain to pay and has a higher imputed credit quality. A security with lower measures on positive credit indicators and higher measures on negative credit indicators is less certain to pay and has lower imputed credit quality.
Question 2 of 10
2. Question
An important mathematical distinction relates to the ordinal versus ratio scale distinction. A related aspect is the number of intervals. Scales with more notches permit more granular risk resolution, while scales with fewer notches permit more credit arbitrage activities to take place. In response to the demand for greater credit risk resolution, CRA scales have increased the number of notches over the years, by extending the range and adding half steps. Another rationale for different rating scales is to target different obligor universes. The classic credit rating is the cross-border rating. What is the main feature covered in the cross-border rating?
Correct
An important mathematical distinction relates to the ordinal versus ratio scale distinction. A related aspect is the number of intervals. Scales with more notches permit more granular risk resolution, while scales with fewer notches permit more credit arbitrage activities to take place. In response to the demand for greater credit risk resolution, CRA scales have increased the number of notches over the years, by extending the range and adding half steps. Another rationale for different rating scales is to target different obligor universes. The classic credit rating is the cross-border rating. It measures the payment strength of borrowers whose debt is denominated in OECD (Organisation for Economic Co-operation and Development) currencies, and whose payment ability may be constrained by foreign exchange availability risk.
Incorrect
An important mathematical distinction relates to the ordinal versus ratio scale distinction. A related aspect is the number of intervals. Scales with more notches permit more granular risk resolution, while scales with fewer notches permit more credit arbitrage activities to take place. In response to the demand for greater credit risk resolution, CRA scales have increased the number of notches over the years, by extending the range and adding half steps. Another rationale for different rating scales is to target different obligor universes. The classic credit rating is the cross-border rating. It measures the payment strength of borrowers whose debt is denominated in OECD (Organisation for Economic Co-operation and Development) currencies, and whose payment ability may be constrained by foreign exchange availability risk.
Question 3 of 10
3. Question
Today, in Hong Kong, the Code of Conduct for Persons Providing Credit Rating Services (“CRA Code”) sets out guidelines for the organization of workflow to assure process quality and integrity. Which among the following are its highlights?
I. Segregation of duties
II. Dedicated resources
III. Excellent infrastructure
IV. Policy and process controls
Correct
Today, in Hong Kong, the Code of Conduct for Persons Providing Credit Rating Services (“CRA Code”) sets out guidelines for the organization of workflow to assure process quality and integrity. Highlights include the following.
Segregation of duties
Dedicated resources
Policy and process controls
Incorrect
Today, in Hong Kong, the Code of Conduct for Persons Providing Credit Rating Services (“CRA Code”) sets out guidelines for the organization of workflow to assure process quality and integrity. Highlights include the following.
Segregation of duties
Dedicated resources
Policy and process controls
Question 4 of 10
4. Question
Not every CRA has been equally transparent about its ratings’ performance. Which among the following can be a factor for making the CRAs way of working more transparent?
Correct
Historically, not every CRA has been equally transparent about its ratings’ performance. In the future, CRA performance reporting is likely to become more transparent and comparable. All licensed or registered CRAs will be required by their regulators to disclose the basis of their ratings and the efficacy of their results. In an environment of greater scrutiny of results, analyst performance is likely to become an important item of the review process.
Incorrect
Historically, not every CRA has been equally transparent about its ratings’ performance. In the future, CRA performance reporting is likely to become more transparent and comparable. All licensed or registered CRAs will be required by their regulators to disclose the basis of their ratings and the efficacy of their results. In an environment of greater scrutiny of results, analyst performance is likely to become an important item of the review process.
Question 5 of 10
5. Question
Through which among the following activity does the SFC regulates CRAs in Hong Kong?
I. Type 16
II. Type 4
III. Type 14
IV. Type 10
Correct
In Hong Kong, the SFC regulates CRAs through Type 10 regulated activity (effective from 1 June 2011). Demand-pull and reputation risk also act as external sources of quality control
Incorrect
In Hong Kong, the SFC regulates CRAs through Type 10 regulated activity (effective from 1 June 2011). Demand-pull and reputation risk also act as external sources of quality control
Question 6 of 10
6. Question
Many types of the covenant are possible. Some are straightforward and intuitive, such as minimum interest coverage ratios, others more complex. Which among the following is true for A voting by series covenant?
Correct
A voting by series covenant would restrict voting eligibility based on the series of notes rather than the entire indenture, when the series is of sufficient size. The rationale for this covenant is that when an indenture has multiple series stretching over a long period of time, the interests of short- and long-term investors with respect to their own series can diverge substantially.
Incorrect
A voting by series covenant would restrict voting eligibility based on the series of notes rather than the entire indenture, when the series is of sufficient size. The rationale for this covenant is that when an indenture has multiple series stretching over a long period of time, the interests of short- and long-term investors with respect to their own series can diverge substantially.
Question 7 of 10
7. Question
Which among the following is correct for Securitization?
I. It is a special case of structured finance where the assets refinanced are private contracts, not securities.
II. It involves different issuer types that produce an alphabet soup of security types.
III. The significance of a private contract is that investors do not have ready benchmarks for pricing non-public collateral; only specialists have that ability.
IV. It utilizes different analytical methods that lead to securities turning out to be “cheap” or “rich” relative to the rating, creating the opportunity for arbitrage.
Correct
Securitization is a special case of structured finance where the assets refinanced are private contracts, not securities. The significance of a private contract is that investors do not have ready benchmarks for pricing non-public collateral; only specialists have that ability.
Incorrect
Securitization is a special case of structured finance where the assets refinanced are private contracts, not securities. The significance of a private contract is that investors do not have ready benchmarks for pricing non-public collateral; only specialists have that ability.
Question 8 of 10
8. Question
Which among the following is true for Commercial mortgage-backed securities(‘CBMS’)?
I. The cash flow value of the assets is said to be determined by the weighted average rating-implied default rate of the collateral.
II. The collateral can vary from a securitization of leases on a single building or many properties.
III. Securities where the underlying asset is commercial real estate collateral.
IV. Asset quality is measured using the rating, not empirical data.
Correct
Commercial mortgage-backed securities (“CMBS”) refers to securities where the underlying asset is commercial real estate collateral. The collateral can vary from a securitization of leases on a single building (where the profile of asset risk is not statistical) to the securitization of rent rolls on many properties (where the profile of asset risk is highly statistical).
Incorrect
Commercial mortgage-backed securities (“CMBS”) refers to securities where the underlying asset is commercial real estate collateral. The collateral can vary from a securitization of leases on a single building (where the profile of asset risk is not statistical) to the securitization of rent rolls on many properties (where the profile of asset risk is highly statistical).
Question 9 of 10
9. Question
Which among the following are a type of CRAs and credit analytics providers?
I. Qualitative credit metrics vendors
II. Special-function rating agencies
III. Domestic rating agencies
IV. Quantitative credit metrics vendors
Correct
Types of CRAs and credit analytics providers
1. Quantitative credit metrics vendors
2. Domestic rating agencies
3. Special-function rating agencies
Incorrect
Types of CRAs and credit analytics providers
1. Quantitative credit metrics vendors
2. Domestic rating agencies
3. Special-function rating agencies
Question 10 of 10
10. Question
The issuer-pay model of CRAs was a stable source of revenue for almost four decades. Which among the following are the reasons for its downfall?
I. Opportunity to consult on the structure in structured finance ratings created an incentive for the CRAs to raise fees.
II. Provided companies to persuade CRAs to manipulate the ratings for their benefit.
III. Shareholder pressures on publicly listed CRAs might have countered any sense of reputation.
IV. Provided the CRAs the opportunity to rate companies and do not explain the methodologies used.
Correct
The issuer-pay model of CRAs was a stable source of revenue for almost four decades, but its weakness became apparent in the later stage of the structured finance market. Many factors appeared that were related to the breakdown of the model. One is that the opportunity to consult on the structure in structured finance ratings created an incentive for the CRAs to raise fees. This is now a prohibited activity under the CRA Code, which states that a CRA should prohibit its representatives who are involved in the rating process from making proposals or recommendations regarding the design of structured finance products that the CRA rates. Shareholder pressures on publicly listed CRAs might have countered any sense of reputation. Now that CRAs are subject to external regulation, the expectation is for a revived emphasis on reputation.
Incorrect
The issuer-pay model of CRAs was a stable source of revenue for almost four decades, but its weakness became apparent in the later stage of the structured finance market. Many factors appeared that were related to the breakdown of the model. One is that the opportunity to consult on the structure in structured finance ratings created an incentive for the CRAs to raise fees. This is now a prohibited activity under the CRA Code, which states that a CRA should prohibit its representatives who are involved in the rating process from making proposals or recommendations regarding the design of structured finance products that the CRA rates. Shareholder pressures on publicly listed CRAs might have countered any sense of reputation. Now that CRAs are subject to external regulation, the expectation is for a revived emphasis on reputation.
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