Deck 10: The Junk Bond and the Leveraged Loan Market and Stapled Financing

Question 1

Witmore's research implied that the Asquith et al. study may have greatly overestimated the risk of high yield bonds.

Answer 1

False

Question 2

Altman and Kishore showed that:

A) High-yield bonds had a 4% higher average return than investment-grade bonds
B) Recovery rates varied by bond seniority
C) Returns are sometimes not closely related to risk
D) None of the above

Answer 2

B

Question 3

Stapled financing is a prearranged financing package put together for potential buyers by the seller and its investment bank.

Answer 3

True

Question 4

Highly confident letters can allow small bidders to make bids for large targets.

Question 5

Ma, Rao, and Peterson showed that the junk bond market was so resilient in the mid-1980s that the bankruptcy of LTV had little impact on bond default probabilities.

Question 6

Which of the following investment banks refused to participate in the junk bond market?

A) Drexel Burnham Lambert
B) Goldman Sachs
C) First Boston
D) Merrill Lynch
E) None of the above True or False Questions

Question 7

In the years after the Great Recession, especially the years 2015-2018, the leveraged loan market steadily declined.

Question 8

Which of the following factors contributed to the collapse of the junk bond market?

A) Default of integrated resources
B) Bankruptcy of Drexel Burnham Lambert
C) LTV bankruptcy
D) All the above

Question 9

Asquith et al. showed that a failure to consider which of the following was a flaw in the Altman and Namacher junk bond studies?

A) Bond returns
B) Aging
C) Bond ratings
D) None of the above
E) All the above

Question 10

Which of the following factors contributed to the growth of the junk bond market?

A) Development of market makers
B) Standardized contracts
C) Changing risk perceptions
D) All the above
E) None of the above

Question 11

Altman and Namacher found the following historical average default rates applied to high-yield bonds:

A) 5%
B) 2%
C) 10%
D) None of the above

Question 12

The fallout from the S&L crisis caused the market supply of high-yield bonds to sharply rise.

Question 13

Answer: The original issue high-yield bond market got its start in the late 1970s.

Question 14

The collapse of the junk bond market mainly ended the use of original issue high-yield bonds in the decades that followed.

Question 15

Junk bond-financed takeovers were mainly concentrated in specific industries that were deregulated.