Chapter 7 RMI

An organization can use securitization to exchange

Income-producing assets for cash.

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the

Risk presented by the income-producing assets held as collateral by the SPV.

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is

special purpose vehicle.

The basic accounting equation on which the balance sheet is structured is

Assets = Liabilities + Net Worth

The balance sheet provides a snapshot of an organization's financial condition

At a given point in time.

Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called

Credit Risk

One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due. This type of risk is called

Credit Risk

Jones, Inc. buys grain from local farmers and re-sells the grain to a number of customers. Jones, Inc. has been approached by Snack Cracker Company. Snack Cracker would like to purchase wheat and corn from Jones, Inc. to use in the crackers it produces. Snack Cracker would like to pay for the grain within 30 days of the date the grain is delivered. As Snack Cracker is a new customer, Jones, Inc. asked to review its financial statements. Which balance sheet ratio would best assist Jones, Inc. in determining if Snack Cracker can pay for the grain within 30 days of the sale?

Current Ratio

An important liquidity measure for a business is its working capital. Working capital is equal to

Current assets minus current liabilities.

Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine

Home Houseware's financial position as of the balance sheet date

A construction company based in the U.S. has building contracts in five different foreign nations. The construction company agreed to accept payment for its work in each country's currency. The risk of loss of value when these foreign payments are converted to U.S. dollars is called

Exchange-rate risk

Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called

Interest rate risk

On a local television program, a financial reporter stated, "There will be big news this week about Sixth National Bank's bad real estate development loans. Unless they get acquired soon, the bank will be broke." The next morning, long lines of depositors waited outside of each Sixth National Bank branch. When the branches opened, depositors began withdrawing their funds. Sixth National Bank did not have enough funds to pay all the depositors and had to close early, which only further compounded the problem. Which one of the following financial risks is Sixth National Bank facing by not having enough cash on hand to meet the immediate demand?

Liquidity risk

Which one of the following is an example of a noncurrent liability?

Long-term notes payable

Owners' equity represents the capital contributed by an organization's owners plus the organization's

Retained earnings

Which one of the following statements is true about an organization's balance sheet?

The balance sheet shows the financial position of a business on a specific date

If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors

Must consider the overall credit risk of the organization.

Which one of the following statements about the balance sheet is correct?

Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

The process of creating a marketable investment security based on the expected cash flows from a financial transaction is

Securitization

Which one of the following statements is true regarding a generic model of a securitization?

The organization sells income-producing assets to an SPV in exchange for cash