When Are the Standby Letters of Credit Used in Swap

question 23

Multiple Choice

When are the standby letters of credit used in swap agreements?

• A)When the counterparty is perceived to be of significantly lower credit quality than the other party.
• B)Where the swap agreement is made between parties of equal credit standing.
• C)Where the swap agreement is made between high-quality counterparties.
• D)When one party posts collateral in lieu of default.

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Definitions:

Goodwill Impairment

The decrease in the value of a company’s goodwill, which occurs when the market value of the entity is less than its recorded value on the balance sheet.

Fair Value Adjustment

An accounting process to adjust the book value of an asset or liability to reflect its current market value.

Equity Method

A method in accounting for logging investments where the investor holds considerable sway over the entity being invested in, yet lacks full control.

Acquisition Differential

The difference between the purchase price of a company and the net fair value of its identifiable assets and liabilities.