Which of the following scenarios are examples of credit enhancements?
A)A manufacturing company makes monthly payments into a sinking fund which it will use to repay principal to bondholders when the bonds mature.
B)A trucking company obtains a lower interest rate on a bank loan for trucks by pledging the vehicles as collateral.
C)Mortgages on residential properties must be insured by the Canada Mortgage and Housing Corporation if the down payment is less than 20%.
D)All of the above.

Question

Quizplus · Accepted Answer

All three scenarios involve measures taken to reduce the risk of default, which is the fundamental purpose of credit enhancements. In scenario A, the manufacturing company establishes a sinking fund to ensure that funds will be available to repay bondholders at maturity, thus reducing the risk of default on the bonds. In scenario B, the trucking company pledges collateral to secure a lower interest rate on a bank loan, which reduces the risk of default for the lender. In scenario C, the requirement for mortgage insurance on properties with less than a 20% down payment reduces the risk of default for the lender because the mortgage is insured by a government agency.

Which of the Following Scenarios Are Examples of Credit Enhancements