Which of the Following Best Describes the Benefits to the Borrower

question 21

Multiple Choice

Which of the following best describes the benefits to the borrower of selling asset-backed securities?

• A) Due to the portfolio effect, the borrower can package up low-quality accounts receivable and sell them for a premium price.
• B) The borrower trades future cash flows for current cash flows.
• C) The asset-backed security is likely to carry a high credit rating of AA or better.
• D) The borrower trades future cash flows for current cash flows and the asset-backed security is likely to carry a high credit rating of AA or better.

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Definitions:

Payback Rule

A capital budgeting principle that evaluates an investment based on the time needed to recoup the invested capital.

Payback Cutoff

The maximum allowable period for an investment to recoup its initial cost, beyond which it is not considered.

NPV

Net Present Value; a calculation used to determine the present value of a series of future cash flows, less the initial investment.

Conventional Cash Flow

A pattern of cash flow over time where an initial outlay is followed by a series of positive cash inflows.