Fixed-Income Markets for Corporate Issuers

First Principles Thinking: classification rule

B is correct. The CFA curriculum states that under normal market conditions longer maturities are associated with both higher government yields and higher credit spreads for a given issuer, so Items I and II are correct. Item III is incorrect because funding a longer project with shorter debt creates rollover risk, meaning the issuer may need to refinance at higher rates later. Thus, only two items satisfy the condition.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and II are supported while Item III reverses the CFA curriculum's rollover-risk logic.

Why option C is incorrect. All three do not qualify because shorter maturity funding does not eliminate rollover risk.

C is correct. The assertion is true because the CFA curriculum lists borrowing a security in order to sell it short as one of the repo market's uses. The reason is false because, from the security buyer's perspective, the transaction is called a reverse repo, not a triparty repo.

First Principles Thinking: classification rule

A is correct. The CFA curriculum states that uncommitted lines are often offered on an unsecured basis to clients with stable cash deposits, so Item I qualifies. Uncommitted lines do not require compensation other than interest on balances outstanding, so Item II is false. The CFA curriculum identifies revolvers, not uncommitted lines, as the most reliable source of short-term bank funding, so Item III is false. Thus, only one item satisfies the condition.

Why option B is incorrect. Only Item I matches the CFA curriculum; the other two conflict with the text on fees and reliability.

Why option C is incorrect. The CFA curriculum does not support all three statements because uncommitted lines lack upfront commitment fees and are the least reliable form of bank borrowing.

First Principles Thinking: classification rule

B is correct. The CFA curriculum states that commercial paper issuance is dominated by large financial institutions, so Item I is correct. It also states that Eurocommercial paper is similar to US commercial paper but typically has smaller transaction sizes and less liquidity, so Item II is correct. Item III is incorrect because the largest issuers also include financial institutions, governments, and supranational agencies. Therefore, only two items satisfy the criterion.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and II are supported and Item III is not.

Why option C is incorrect. All three do not qualify because commercial paper is not limited to non-financial corporations.

First Principles Thinking: classification rule

A is correct. Under factoring, the company sells accounts receivable to a factor at a substantial discount, so Item I is correct. The CFA curriculum contrasts this with assignment, under which the company remains responsible for collection, making Item II incorrect. It also states that inventory can be used in different ways as collateral for a loan, so Item III is incorrect. Only one statement matches the factoring rule.

Why option B is incorrect. Two statements do not qualify because Item II describes assignment, and Item III conflicts with the CFA curriculum's treatment of inventory as possible collateral.

Why option C is incorrect. All three are not consistent with factoring because only the sale of receivables to a factor is part of that arrangement.

First Principles Thinking: classification rule

A is correct. The CFA curriculum explains that the triparty agent administers the transaction and handles cash, securities, collateral valuation, management, and custody, so Item I is correct. Item II is incorrect because the agent does not change the credit risk relationship between participants. Item III is incorrect because a repo executed directly between two parties is a bilateral repo. Therefore, only one item satisfies the criterion.

Why option B is incorrect. Two items are wrong because the triparty structure neither eliminates participant credit risk nor describes direct bilateral execution.

Why option C is incorrect. All three are not accurate descriptions of triparty repos; only the agent's administrative role is correct.

C is correct. The CFA curriculum states that investors usually require a committed backup line of credit, or liquidity enhancement, to address rollover risk. A credit rating does not itself ensure repayment if rollover is not possible.

First Principles Thinking: classification rule

A is correct. The CFA curriculum defines revolvers as multiyear credit commitments in which lenders typically seek covenant protections, so Item I is correct. Item II is incorrect because uncommitted lines are the least reliable form of borrowing. Item III is incorrect because revolvers have similar borrowing rates and commitment fee features to regular committed lines. Hence, only one item meets the rule.

Why option B is incorrect. The CFA curriculum supports only Item I; the other two describe other instruments or contradict the stated fee structure.

Why option C is incorrect. All three do not qualify because revolvers are reliable and may include commitment fees.

First Principles Thinking: classification rule

A is correct. The CFA curriculum states that investors usually require a committed backup line of credit, or liquidity enhancement, to ensure maturing commercial paper can be repaid if rollover is not possible, so Item I qualifies. Item II does not reduce rollover risk because it depends on more issuance. Item III is also insufficient because a credit rating does not itself remove rollover risk. Thus, only one item fits.

Why option B is incorrect. Two items do not satisfy the condition because only the committed backup line directly addresses failure to roll the paper.

Why option C is incorrect. All three do not minimize rollover risk; the CFA curriculum singles out liquidity enhancement rather than extra issuance or ratings alone.

First Principles Thinking: classification rule

A is correct. The CFA curriculum states that greater collateral uniqueness, meaning higher demand for a specific security, lowers the repo rate, so Item I qualifies. Higher collateral risk increases repo rates, making Item II incorrect. Repo rates generally increase with maturity under normal conditions, so Item III is also incorrect. Only one item lowers the repo rate.

Why option B is incorrect. Two items do not qualify because both higher collateral risk and longer term move repo rates upward in the CFA curriculum.

Why option C is incorrect. All three do not lower the repo rate; only the uniqueness of the collateral does.

A is correct. The CFA curriculum states that committed lines are more reliable than uncommitted lines because they involve a formal written commitment. The reason is therefore the mechanism that explains the assertion.

First Principles Thinking: classification rule

B is correct. The CFA curriculum says default risk is the primary exposure under a repo even with collateral, so Item I is correct. It also states that margining risk involves proper and timely collateral valuation and transfer of variation margin, so Item II is correct. Item III is incorrect because triparty agents do not change the underlying credit risk relationship between participants. Therefore, two statements satisfy the criterion.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and II match the stated risk framework.

Why option C is incorrect. All three are not consistent because the CFA curriculum explicitly says triparty structure does not remove participant credit risk.

First Principles Thinking: classification rule

A is correct. The CFA curriculum defines debut issuers as first-time bond issuers, with examples including new corporate legal entities formed after a merger, acquisition, or divestiture that refinance existing debt. Item I fits that definition. Item II is secondary market trading, not issuance. Item III is a reopening of an existing bond, not a debut issue. Therefore, only one item qualifies.

Why option B is incorrect. Two items do not qualify because only Item I is a debut issuer example; Items II and III refer to later trading or reopening activity.

Why option C is incorrect. All three do not satisfy the criterion because the CFA curriculum clearly distinguishes secondary trading and reopening from a first-time bond issuance.

A is correct. The CFA curriculum explains that borrowers who expect improved creditworthiness often issue callable debt. The reason states the mechanism: if the refinancing savings exceed the call premium, calling the bonds and reissuing at a lower YTM is rational.

First Principles Thinking: classification rule

A is correct. The defining criterion for a committed regular line is the formal written commitment, so Item I is correct. The CFA curriculum says regular committed lines usually involve upfront costs in the form of a commitment fee, so Item II is incorrect. Multiyear credit commitments with covenant protections are revolvers, not regular committed lines, so Item III is incorrect. Therefore, only one item qualifies.

Why option B is incorrect. Two items cannot qualify because the CFA curriculum assigns the fee-free feature to uncommitted lines and the multiyear covenant feature to revolvers.

Why option C is incorrect. All three are not correct because only the written commitment is a defining feature of a regular committed line.

D is correct. The assertion is false because the CFA curriculum says fallen angels usually retain investment-grade bond features, including typically being non-callable, having few restrictions and covenants, and having longer maturities. The reason is true because original investment-grade investors may need to sell once the bonds fall below required ratings.

First Principles Thinking: classification rule

A is correct. In the CFA curriculum's ABCP structure, the bank transfers short-term loans to an SPE, and the SPE issues ABCP to investors with a backup liquidity line provided by the bank, so Item I is correct. Item II is incorrect because this financing is described as off-balance-sheet for the issuer. Item III is incorrect because investors buy a liquid, short-term note backed by loan cash flows, not direct ownership of the loans. Only one statement qualifies.

Why option B is incorrect. Two statements are not correct because the balance-sheet treatment and investor position are both misstated in Items II and III.

Why option C is incorrect. The CFA curriculum does not support all three statements; only the SPE issuance with bank liquidity support is accurate.

First Principles Thinking: classification rule

A is correct. The CFA curriculum says collateral should have little or no correlation with counterparty credit risk to diversify exposure, so Item I is correct. Item II is incorrect because default risk remains the primary exposure despite collateral. Item III is incorrect because valuation and variation margin relate to margining risk, whereas legal risk concerns enforceability of rights under the agreement. Thus, only one statement is consistent with the classification.

Why option B is incorrect. Two items do not fit because the CFA curriculum expressly preserves default risk and separately defines margining risk and legal risk.

Why option C is incorrect. All three are not consistent with the repo risk discussion; only the low-correlation collateral criterion is stated that way.

A is correct. The CFA curriculum describes ABCP as off-balance-sheet financing. That treatment follows from the structure in which the bank transfers short-term loans to an SPE and the SPE issues the ABCP.

First Principles Thinking: classification rule

B is correct. The CFA curriculum states that on-the-run developed market sovereign bonds are typically the most liquid, so Item I is correct. It also states that recently issued corporate bonds from frequent issuers of higher credit quality usually have the greatest liquidity and tightest spreads, so Item II is correct. Item III is incorrect because less frequent or more seasoned corporate issues tend to have wider spreads, often at least 10 to 20 basis points or more. Thus, two items qualify.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and II match the liquidity rules in the CFA curriculum.

Why option C is incorrect. All three do not satisfy the criterion because the CFA curriculum says seasoned issues of less frequent issuers are rarely traded and usually have wider spreads.

First Principles Thinking: classification rule

A is correct. The CFA curriculum states that investment-grade bonds derive a larger share of YTM from the government benchmark and typically carry few or no restrictive covenants, so Item I is correct. Item II is incorrect because high-yield issuers face shorter maturities and more investor constraints. Item III is incorrect because the CFA curriculum describes high-yield debt as more equity-like, not more bond-like. Hence, only one item matches the rule.

Why option B is incorrect. Two items do not qualify because the CFA curriculum assigns tighter restrictions and more equity-like cash flows to high-yield debt.

Why option C is incorrect. All three are not consistent with the contrast; only Item I reflects the stated investment-grade characteristics.

First Principles Thinking: classification rule

C is correct. The CFA curriculum states that high-yield issuers typically face shorter maturities of 10 years or less, so Item I is correct. Because default is more likely, analysts emphasize likelihood of default and loss given default, making Item II correct. The CFA curriculum also explains that issuers expecting improved creditworthiness often choose callable debt so they can refinance at a lower YTM if spreads fall enough, so Item III is correct. All three statements satisfy the criterion.

Why option B is incorrect. Only two is too low because each item is directly supported by the discussion of high-yield issuance and callable debt.

Why option C is incorrect. This option is not incorrect; it is correct because all three statements match the CFA curriculum's treatment of high-yield features.

First Principles Thinking: classification rule

B is correct. In the timeline, the investor conference call occurs at 10:30 a.m. The order book closes at 12:00 p.m., and the final term sheet is delivered at 4:00 p.m., so Items II and III occur after the call. Item I takes place at 9:00 a.m., before the conference call. The count is therefore two.

Why option B is incorrect. This option is not incorrect; it is correct because exactly Items II and III happen after the conference call.

Why option C is incorrect. All three are not after the investor call because the agreement to launch the transaction precedes it.

First Principles Thinking: classification rule

B is correct. The CFA curriculum explains that investment-grade borrowers can usually choose maturities up to 30 years and are accepted by investors with few or no restrictive covenants, so Items I and II are correct. Item III is incorrect because high investor confidence in investment-grade issuers allows relatively little monitoring from bondholders throughout the debt term. Therefore, exactly two statements satisfy the criterion.

Why option B is incorrect. This option is not incorrect; it is correct because the CFA curriculum supports Items I and II but not the claim of equally restrictive monitoring.

Why option C is incorrect. All three do not qualify because investment-grade debt is explicitly described as less restrictive than high-yield debt.

First Principles Thinking: classification rule

B is correct. The CFA curriculum describes the security seller as the cash borrower, so Item I is correct. It also states that the security seller retains ownership of the security over the repo term, so Item II is correct. Item III is incorrect because the security buyer receives the repo rate, while the seller retains the interest and actual coupon paid by the security. Thus, exactly two statements satisfy the rule.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and II match the repo mechanics in the CFA curriculum.

Why option C is incorrect. All three do not qualify because the buyer's defining return is the repo rate rather than the security coupon.

First Principles Thinking: classification rule

B is correct. The CFA curriculum distinguishes a public offering, where any member of the public may buy the bonds, from a private placement, where only a selected investor or group may buy them, so Items I and II qualify. Item III does not qualify because repeat fixed-income issuers usually issue a new security priced at or close to par rather than increasing shares under an identical instrument. Therefore, only two statements satisfy the criterion.

Why option B is incorrect. This option is not incorrect; it is correct because exactly two items, I and II, match the CFA curriculum's classification.

Why option C is incorrect. All three do not qualify because Item III conflicts with the CFA curriculum's distinction between follow-on equity issuance and repeat bond issuance.

First Principles Thinking: classification rule

C is correct. The CFA curriculum's four-step example shows the hedge fund as security buyer borrowing the security in the repo market and selling it in the cash market, so Item I is correct. It later buys back the security and returns it in the repo to settle, so Item II is also correct. The CFA curriculum then states that from the security buyer's perspective, the transaction is referred to as a reverse repurchase agreement or reverse repo, making Item III correct. All three statements therefore satisfy the condition.

Why option B is incorrect. Only two is too low because the CFA curriculum supports each of the three steps and the naming convention.

Why option C is incorrect. This option is not incorrect; it is correct because all three items are explicitly described or directly implied by the CFA curriculum.

First Principles Thinking: classification rule

B is correct. The CFA curriculum describes demand deposits as checking-account-type deposits available for transactions and paying little or no interest, so Item I is correct. It also states that large-denomination CDs are a common wholesale funding source from institutional investors, so Item III is correct. Item II is incorrect because selling in the open market applies to negotiable CDs; non-negotiable CDs instead involve a penalty for early withdrawal. Therefore, only two statements satisfy the rule.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and III align with the deposit classifications in the CFA curriculum.

Why option C is incorrect. All three are not consistent because Item II confuses negotiable CDs with non-negotiable CDs.

B is correct. The assertion is true because the CFA curriculum says repo rates generally increase with maturity under normal market conditions. The reason is also true, but collateral uniqueness is a different driver and does not explain the maturity effect.

First Principles Thinking: classification rule

A is correct. The CFA curriculum defines fallen angels as formerly investment-grade issuers whose outstanding debt still has investment-grade features, so Item I is correct. Item II is incorrect because divestment follows deterioration in credit quality, not improvement. Item III is incorrect because the CFA curriculum says their likelihood of financial distress is similar to that of other high-yield issuers. Therefore, only one item satisfies the criterion.

Why option B is incorrect. Two items are not accurate because the trigger for forced selling is deterioration, and the distress likelihood is not lower than that of other high-yield issuers.

Why option C is incorrect. All three do not describe fallen angels; only the retention of investment-grade bond features is supported by the CFA curriculum.

First Principles Thinking: classification rule

A is correct. The CFA curriculum defines commercial paper as short-term unsecured notes used for working capital, seasonal cash needs, or bridge financing, so Item I is correct. Item II is incorrect because commercial paper is unsecured. Item III is incorrect because the CFA curriculum says corporate commercial paper typically matures in less than three months. Therefore, only one item satisfies the criterion.

Why option B is incorrect. Only Item I is supported; the other two contradict the unsecured and very short-term nature of commercial paper.

Why option C is incorrect. All three are not correct because the CFA curriculum does not describe commercial paper as secured or longer than one year.

B is correct. The assertion is true because banks may refuse to honor requests under uncommitted lines, making them the least reliable. The reason is also true, but the absence of fees does not explain the lack of reliability.

First Principles Thinking: classification rule

A is correct. The CFA curriculum lists three repo purposes, including financing the ownership of a security, so Item I is correct. Item II is incorrect because the income is earned by lending funds on a secured basis. Item III is incorrect because the CFA curriculum says a security may be borrowed in order to sell it short, not merely to hold it. Therefore, only one listed item matches the stated purposes.

Why option B is incorrect. Two items do not satisfy the criterion because the security of the lending and the short-sale purpose are misstated.

Why option C is incorrect. All three are not repo purposes as stated in the CFA curriculum; only financing ownership appears exactly as listed.

First Principles Thinking: classification rule

B is correct. The CFA curriculum says unsecured interbank loans and deposits typically range from overnight to one year, so Item I is correct. It also states that last-resort borrowing from the central bank may require collateral and may lead to greater oversight, so Item III is correct. Item II is incorrect because such lending is offered at a higher interest rate than the central bank funds rate. Hence, two items qualify.

Why option B is incorrect. This option is not incorrect; it is correct because Items I and III match the CFA curriculum and Item II contradicts it.

Why option C is incorrect. All three do not satisfy the condition because discount window lending is not cheaper than central bank funds borrowing.

D is correct. The assertion is false because the CFA curriculum says a repo offers a collateralized investment with minimal liquidity or default risk from the security buyer's perspective. The reason is true because overnight repos with high-quality collateral provide the lowest return.