Question

In: Economics

Q. Which of the following institutional investors most likely must spend a target percentage of the...

Q. Which of the following institutional investors most likely must spend a target percentage of the portfolio annually?

  1. Endowments
  2. Life insurance firms
  3. Property and casualty insurance firms

Q. All else being equal, which bonds typically have the widest credit spreads?

A. A-rated corporate bonds

B. AA-rated corporate bonds

C. AAA-rated corporate bonds

Solutions

Expert Solution

1) Option A - Endowments

Endowment fund is a long term fund and it is typically set up by universities or colleges. This is a kind of institutional fund which is intended for perpetual operation. The fund covers the expenses for providing services to the students or patients in case of hospital or for its members in case of organization. However, they need to spend a part of their portfolio annually and managing committee set the percentage of annual spending.

2) Option A - A-rated corporate bonds

In the investment industry the ratings given by agencies supports the decision-making process. The ratings give us the idea about risk associated with it. The AAA rated bond is considered as the investment grade asset and carries low risk. The AA rated comes next and A rate still good but relatively riskier than AA rated or AAA rated bond.
The credit spread is nothing but the risk premium over the risk free asset and it will be widest in case A-rated bond in all three options.

Rahul Sunny answered 2 years ago
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