Chapter 22 CAÍA

Question 1

Vintage Year

Answer 1

Venture capital (VC), the best known of the private equity categories, is early-stage financing for young firms with high potential growth that do not have a sufficient track record to attract investment capital from traditional sources, like public markets or lending institutions.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 616). Wiley. Edición de Kindle.

Question 2

Venture Capital

Answer 2

Venture capital (VC), the best known of the private equity categories, is early-stage financing for young firms with high potential growth that do not have a sufficient track record to attract investment capital from traditional sources, like public markets or lending institutions.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 616). Wiley. Edición de Kindle.

Question 3

Burn Rate

Answer 3

The burn rate of young businesses describes the speed with which cash is being depleted through time and can be used to project when the organization will again require outside funding.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 616). Wiley. Edición de Kindle.

Question 4

Venture Capital Securities

Answer 4

Venture capital securities are the privately held stock, or equity-linked securities, that venture capitalists obtain when investing in business ventures that are striving to become larger and to go public. Investors in venture capital securities must be prepared to invest for the long haul; investment horizons may be as extended as 5 to 10 years. During this time, venture capitalists often take active roles in providing ​managerial guidance and, to varying degrees, exercising managerial control. The ultimate goal of the venture capitalist is for the venture to be successful, usually to the point that the firm can exit the investment at a profit.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 616-617). Wiley. Edición de Kindle.

Question 5

Prudent Person Standard

Answer 5

The prudent person standard is a requirement that specifies levels of care that should be exercised in particular decision-making roles, such as investment decisions made by a fiduciary. Prudent person rules were established to ensure competent investment decision-making with regard to the large and growing pension assets and liabilities of U.S. corporations.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 617). Wiley. Edición de Kindle.

Question 6

Junk Bonds

Answer 6

Junk bonds are debt instruments with high credit risk, also referred to as high-yield, non-investment-grade, or speculative-grade debt.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 618). Wiley. Edición de Kindle.

Question 7

Merchant Banking

Answer 7

Junk bonds are debt instruments with high credit risk, also referred to as high-yield, non-investment-grade, or speculative-grade debt.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 618). Wiley. Edición de Kindle.

Question 8

Mezzanine Debt

Answer 8

Mezzanine debt contains both equity-like and debt-like features and is referred to as mezzanine because it is inserted into a company’s capital structure between the floor of equity and the ceiling of senior secured debt.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 620). Wiley. Edición de Kindle.

Question 9

Story Credit

Answer 9

A story credit is a debt issue with credit risk based on unusual circumstances, and may involve special aspects, such as corporate reorganizations, that distinguish their analysis from more traditional circumstances and as such involve a story. Generally, story credits are senior secured financings of firms with good credit. However, not all firms that issue mezzanine debt have good credit or interesting stories. In fact, firms for which the debt is their only viable source of financing may issue mezzanine debt.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 621). Wiley. Edición de Kindle.

Question 10

Middle Market

Answer 10

The middle market refers to companies that are not as large as those companies that have ready access to the financial markets but are larger than companies seeking venture capital.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 621). Wiley. Edición de Kindle.

Question 11

Distressed Debt Investing

Answer 11

Distressed debt investing is the practice of purchasing the debt of troubled companies, requiring special expertise and subjecting the investor to substantial risk.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 621). Wiley. Edición de Kindle.

Question 12

Charge Off Loans

Answer 12

Charge-off loans are the loans of a financial institution or other lender that have been sold to investors and written off the books of the lender at a loss. These loans included auto deficiencies, credit card paper, medical and health-care receivables, personal loans, retail sales agreements, and insurance premium deficiencies, as well as aviation, boat, and recreational vehicle loans.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 622). Wiley. Edición de Kindle.

Question 13

Covenant Lite Loans

Answer 13

Covenant-lite loans are loans that place minimal restrictions on the debtor in terms of loan covenants.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 623). Wiley. Edición de Kindle.

Question 14

Negative covenants

Answer 14

Negative covenants are promises by the debtor not to engage in particular activities, such as paying dividends or issuing new debt.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 623). Wiley. Edición de Kindle.

Question 15

Positive covenants

Answer 15

Positive covenants are promises to do particular things, such as maintain a specified cash level.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 623). Wiley. Edición de Kindle.

Question 16

Incurrence Covenants

Answer 16

Incurrence covenants typically require a borrower to take or not take a specific action once a specified event occurs.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 623). Wiley. Edición de Kindle.

Question 17

Haircut

Answer 17

In finance, the term haircut usually refers to a percentage reduction applied to the value of securities in determining their value as collateral. However, the term can also be used to refer more generally to any percentage reduction in financial value.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 624). Wiley. Edición de Kindle.

Question 18

Leveraged Loans

Answer 18

Leveraged loans are syndicated bank loans to non-investment-grade borrowers.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 624). Wiley. Edición de Kindle.

Question 19

Conditions under which a loan is considered levered

Answer 19

Generally, a loan is considered leveraged if (1) the borrower has outstanding debt that is rated below BBB by Standard & Poor’s or lower than Baa by Moody’s, or (2) the loan bears a coupon that is in excess of 125 to 200 basis points over the London Interbank Offered Rate (LIBOR).

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 624). Wiley. Edición de Kindle.

Question 20

Business development companies (BDCs)

Answer 20

Business development companies (BDCs) are publicly traded funds with underlying assets typically consisting of equity or equity-like positions in small, private companies. BDCs use a closed-end structure and trade on major stock exchanges, especially the NASDAQ.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 625). Wiley. Edición de Kindle.

Question 21

BDC Classification

Answer 21

To be classified as a BDC and enjoy the accompanying benefits, such as avoiding corporate income tax, a BDC must provide significant managerial assistance to the firms that it owns and must invest at least 70% of its investments in eligible assets, as specified by the Securities and Exchange Commission (SEC).

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 625). Wiley. Edición de Kindle.

Question 22

Private investments in public equity (PIPE)

Answer 22

Private investments in public equity (PIPE) transactions are privately issued equity or equity-linked securities that are placed outside of a public offering and are exempt from registration. Investors purchase the securities directly from a publicly traded company in a private transaction.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 631). Wiley. Edición de Kindle.

Question 23

Traditional PIPE’s

Answer 23

The large majority of PIPE transactions are traditional PIPEs, in which investors can buy common stock at a fixed price. Most traditional PIPE transactions are initiated using convertible preferred stock or debt with a fixed price at which the securities can be converted into common stock.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 632). Wiley. Edición de Kindle.

Question 24

Structured PIPEs

Answer 24

Structured PIPEs include more exotic securities, like floating-rate convertible preferred stock, convertible resets, and common stock resets. These PIPEs have a floating conversion price that can change depending on the price of the publicly traded common stock.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 633). Wiley. Edición de Kindle.

Question 25

Toxic PIPE

Answer 25

A toxic PIPE is a PIPE with adjustable conversion terms that can generate high levels of shareholder dilution in the event of deteriorating prices in the firm’s common stock.

Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 633). Wiley. Edición de Kindle.