An entity desiring to issue a fixed-income security has placed $10 million worth of loan receivables in a special purpose vehicle (SPV) that is completely independent of the company. Additionally, the credit rating agencies have suggested the entity secure a third-party guarantee in order to have the security rated
AAA. After completing the transfer of assets to the SPV and obtaining a letter of credit from a national bank, the entity issued the AAA-rated security. Which of the following securities did the entity most likely issue?
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A. B. C.C
Based on the information provided, the entity desired to issue a fixed-income security and took specific actions to enhance its credit rating to AAA. Let's analyze the given options and determine the most likely security issued by the entity.
A. Commercial paper: Commercial paper refers to short-term, unsecured promissory notes issued by corporations to meet short-term financing needs. It is typically issued for periods ranging from a few days to several months. However, the given scenario mentions that the entity placed $10 million worth of loan receivables in a special purpose vehicle (SPV) and obtained a letter of credit from a national bank. These actions suggest a more structured and secure issuance rather than unsecured commercial paper. Therefore, commercial paper is unlikely to be the security issued.
B. International bonds: International bonds are debt securities issued by corporations or governments in a foreign currency and sold to investors outside the issuing country. The given scenario does not mention any international aspect or foreign currency involvement. The information provided focuses on the entity's actions of transferring loan receivables to an SPV and securing a third-party guarantee to achieve a AAA rating. Hence, it is unlikely that international bonds were issued.
C. Asset-backed securities (ABS): Asset-backed securities are securities backed by a pool of financial assets, such as loans, leases, or receivables. In the given scenario, the entity transferred $10 million worth of loan receivables to a special purpose vehicle (SPV), which is independent of the company. This indicates the creation of a pool of assets in the SPV. Additionally, the credit rating agencies suggested securing a third-party guarantee to obtain a AAA rating. These actions align with the characteristics of asset-backed securities, where the underlying assets are often segregated in an SPV to provide security to investors. By obtaining a third-party guarantee and a letter of credit, the entity further enhances the credit quality of the security. Therefore, the most likely security issued by the entity in this scenario is asset-backed securities (ABS).
In summary, based on the information provided, the entity most likely issued asset-backed securities (ABS) after transferring $10 million worth of loan receivables to a special purpose vehicle (SPV), obtaining a third-party guarantee, and securing a letter of credit from a national bank to achieve a AAA rating.