Directions: Read the following passage and answer the questions that follows.
The three investment funds from which BNP suspended redemptions in August 2007 held less than 0.5% of the money the French bank managed at the time. Yet these humble entities turned out to be the proverbial canaries in the coal mine: their spasm was one of the first signs of the impending credit crunch. The question of the moment is whether several similarly obscure funds that recently announced forced liquidations are canaries too. Do their woes reveal financial fault-lines, or did they just take exceptional risks?
The funds in question all invested in low-rated corporate debt. Investors have soured on such “high-yield” or “junk” bonds this year, causing prices to fall sharply and yields to surge. The best-known of the victims, a mutual fund managed by a firm called Third Avenue, specialised in distressed debt, on which average yields have risen from 8% in 2014 to an astronomical 18% now. The fund had lost 27% of its value this year and had seen big withdrawals, which together had caused its assets to shrink from $3 billion to $790m before Third Avenue suspended redemptions on December 10th. The firm said that the febrile state of the markets and the accompanying rush of withdrawals were forcing it to sell the fund’s holdings at fire-sale prices. An orderly unwinding, it argued, would serve investors better.
The next day a hedge-fund manager called Stone Lion Capital announced a suspension of redemptions from its junk funds. And on December 14th Lucidus Capital Partners, a fund manager specialising in high-yield bonds, said it had liquidated all its investments.
Doomsters point in particular to a mismatch at the heart of Third Avenue’s model. Its high-yield fund’s prospectus promised investors quick access to their money but its bets were on illiquid and risky assets. Its second-biggest position was in the bonds of a bankrupt firm called Energy Futures Holdings Corporation. Unrated securities amounted to 40% of assets. Whatever the merits of these investments, they proved hard to shift in a skittish market.
That has prompted close scrutiny not just of other junk-bond mutual funds but also of exchange-traded funds (ETFs) that hold high-yield debt. ETFs are structured so that they can be traded as easily as conventional shares, even though the underlying assets are often not nearly as liquid. (Shares in junk-bond ETFs have continued to change hands energetically this week.)
Yet junk-bond funds make poor canaries. For one thing, even their name conveys risk. Unlike the funds that buckled at the start of the credit crunch, they are not seen as relatively safe investments. Many of the concerns about credit centre on the debt of energy and mining firms, whose troubles have been widely aired during the year-long rout in commodity prices. These industries account for only $225 billion or so of the $1 trillion market for junk bonds, according to Wells Fargo, a bank.
Energy firms with good credit ratings continue to borrow relatively cheaply. On December 10th, for instance, Schlumberger, an oil-services firm, sold $6 billion in bonds with an interest premium of just 1-2 percentage points over Treasuries. Blue chips in other industries can borrow even more cheaply: on December 9th Visa paid a premium of less than one percentage point to borrow $16 billion.
Regulators have long worried that the illiquidity of corporate bonds could prove a problem for fund managers, and that fire sales at such funds may prove a systemic risk. Ironically, the bond market is less liquid than it used to be, in part because of more exacting capital requirements that have made it more expensive for banks to hold bonds. But the tentative solution regulators have proposed—classing some big fund managers and mutual funds as “systemically important” and thus subject to stricter rules—would not have helped in this case. None of the firms that are now in difficulties would have been big enough to qualify. Small funds did signal big tremors back in 2007. But given their explicit riskiness, the idea that today’s failing funds are canaries looks more like a canard.
- What according to the passage is true about the firm called “Third Avenue”?
i. The corporate is a victim of investment fund.
ii. is specialized in distress debt
iii. Suspended redemption on the last month of the year
iv. high yeilding fund
A) Only i
B) All of these
C) Both ii and iii
D) All except i
E) None of these
- What is the meaning of the term “Systematically important”?
A) beneficial
B) crucial
C) necessary
D) important
E) None of these
- What is the appropriate meaning of “fire-sale prices”?
A) destruction of commercial premises
B) reference to the sale of goods
C) selling at discounted price
D) seller faces bankruptcy
E) None of these
- What is the most appropriate synonym of the word “obscure” according to the context of the passage:
A) obvious
B) murky
C) distinct
D) conspicuous
E) None of these
- Why the regulators of investment funds are worried?
i. illiquidity of corporate bonds
ii. discounted selling is a risky factor
iii. liquidity will worry the investors
A) both i and ii
B) both ii and iii
C) both i and iii
D) all of these
E) None of these
- What is the most appropriate antonym of the word “tremors” according to the context off the passage:
A) flutter
B) equanimity
C) throb
D) fear
E) None of these
- What is the most appropriate meaning of the word “febrile”?
A) aloof
B) delirious
C) arc
D) bleak
E) None of these
- What is the tone of the passage?
A) lamenting
B) optimistic
C) ironic
D) Informative
E) None of these
- What is the most appropriate meaning of the word “spasm”:
A) harmony
B) throe
C) contraction
D) painkiller
E) None of these
- What should be the most appropriate Title of the passage?
A) Importance of investment
B) Investment funds
C) Canary or canard?
D) Victims of investment
E) None of these
ty az:)
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it was like po mains level comprehension …
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6/10
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