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What ensures that firms are not able to selectively default on some obligations without being considered in default on the others?
Suggested Answer: A
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It is the cross-default clauses in debt agreements that generally provide that a default on one obligation is considered a credit event applying to all debts of the obligor, and therefore we are able to deal with credit risk at the borrower level, and not at the level of the individual security. It also helps avoid situations where borrowers can selectively default on some obligations while continuing to service others. Therefore Choice 'a' is the correct answer. The other choices are incorrect.
29 comments · newest first
KE
Kenny
10 months ago
Wait, are you sure about A? Seems too simple.
AL
Aleta
10 months ago
I think B is more relevant, Chapter 11 has strict rules.
WA
Wade
10 months ago
Definitely A, cross-default clauses are key.
SH
Sharika
10 months ago
C is important too, but A is the main reason.
JO
Joye
10 months ago
A makes the most sense, can't pick and choose defaults!
NA
Nadine
11 months ago
Exchange listing requirements might have some influence, but I feel like they don’t directly address the issue of selective defaults like cross-default clauses do.
AL
Alex
11 months ago
Chapter 11 seems more about restructuring than preventing defaults, so I’m leaning towards cross-default clauses, but I could be wrong.
JU
Julio
11 months ago
I remember practicing a question about debt covenants, and I think cross-default clauses were mentioned as a way to prevent selective defaults.
BE
Bernardine
11 months ago
I think cross-default clauses are really important because they link all obligations together, but I'm not completely sure if that's the only mechanism.
AL
Alyce
12 months ago
The bankruptcy code seems relevant here, but I'm not sure if that's the full answer. I'll need to think through the other options as well to be sure.
JO
Joaquin
12 months ago
I'm pretty confident the answer is A. Cross-default clauses are designed to prevent firms from defaulting on some obligations without being considered in default on others.
RE
Reynalda
12 months ago
Okay, I think I've got this. Cross-default clauses in debt covenants are what ensure firms can't selectively default. That makes sense to me.
MO
Mozell
1 year ago
Hmm, I'm a bit unsure about this one. I know cross-default clauses have something to do with it, but I'm not totally clear on the details. I'll have to review that concept.
SH
Shaniqua
1 year ago
This seems like a tricky question. I'll need to think carefully about the different options and how they relate to preventing selective default.
DO
Dorathy
1 year ago
Chapter 11? More like Chapter Bored, amirite? But seriously, the bankruptcy code is the answer.
SC
Scarlet
1 year ago
Exchange listing requirements? More like 'Exchange Listing Demands', am I right?
ST
Stanton
1 year ago
Haha, 'Exchange Listing Demands' does have a nice ring to it!
EL
Elenora
1 year ago
D) The bankruptcy code
TH
Theron
1 year ago
C) Exchange listing requirements
CH
Chun
1 year ago
B) Chapter 11 regulations
SH
Shannan
1 year ago
A) Cross-default clauses in debt covenants
LA
Lawana
1 year ago
But what about the bankruptcy code? Doesn't that also prevent selective default?
ON
Oneida
1 year ago
I agree with Dewitt. Cross-default clauses ensure firms can't selectively default.
DE
Dewitt
1 year ago
I think the answer is A) Cross-default clauses in debt covenants.
KI
Kimberely
1 year ago
Cross-default clauses? Sounds like a superhero team-up to me!
LO
Lorenza
1 year ago
The bankruptcy code is the way to go. It's like a one-stop shop for all your default needs!
RU
Rueben
1 year ago
B) Chapter 11 regulations
EL
Elena
1 year ago
The bankruptcy code covers all bases.
KA
Kathryn
1 year ago
A) Cross-default clauses in debt covenants