High yield debt structures will least likely have which of the following characteristics? A) Well collateralized senior debt. B) Senior subordinated debt. C) Payment-in-kind bonds. D) Bank debt. The correct answer is A). By the way, what is payment-in-kind bonds? Can anyone help?
Debt structures (CDO’s) are typically collateralized by debt which includes below investment grade corporate bonds, corporate loans advanced by commercial banks, and bond issues in emerging markets. Investment grade bonds are not usually an underlying asset in CDOs. Payment-in-kind bonds allow payment with other debt which is risky, so it could be included. The question states that it is a high yield debt structure, so the only item on here that is not too risky (not as high of a yield) is well-collateralized sr. debt->A
Does “high-yield debt structures” = CDO’s in your curriculum? Anyway, we talked about PIK bonds in another thread so use search. You shouold be able to look at those four and say that 1 of those things just doesns’t belong. In particular “well collateralized” should stand out huge.
Just making an analogy.
So it does or doesn’t? (I really don’t know the answer to that question). Edit: I would say that high-yield debt structures is much bigger than CDO’s because it includes all kinds of other structured finance products. But it might be that CDO’s have grown so big that CFAI says “high-yield debt structures” = CDO’s.
I am not sure if and do not believe that CFAI specifically states that they are one and the same. However, using the rationale behind a CDO, you can state, with reason, that well collateralized sr. debt is least likely included. Regardless - I still like and frequently use your first method of picking out the one that doesn’t belong. That works equally as well.
I agree with that and wasn’t trying to criticize your answer at all.