Question

In: Finance

2. Explain the different type of risk that a bond investor and issuer face. How does...

2. Explain the different type of risk that a bond investor and issuer face. How does a bond's term and collateral changed to affect its interest rate?

Solutions

Expert Solution

Bond investor and Issuer will be facing-

A. Credit risk is faced by most of the bondholders and it is risk that payment related to principal will not be made by the bond issuer, because of his lack of debt repayment ability.

B. Default risk is another risk that is related to lack of payment of interest by Bond issuer to the bond holder.

C. Reinvestment risk is a risk which is faced by Bond holder because of call option embedded with the bond as this bond will be reinvested at market rate.

D. Prepayment risk is another is which is faced in regards to Bond that payment will be made before the maturity period.

Bond maturity and collateral will be change in order to affect the interest rate as when there would be a higher Bond maturity there would be a lower rate of interest and when there would be a collateral associated with the bond, it will also mean that the bond will be issued at a lower price.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value...
An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value of $5,000. Assume the bond’s 8.4% yield to maturity is expected to remain constant over the duration of the bond’s life. What is the rate of return on his investment, if he sells this bond ten years later? Group of answer choices Not enouh information to answer the question 4.20% 6.72% 5.04% 8.40%
An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value...
An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value of $5,000. Assume the bond’s 8.4% yield to maturity is expected to remain constant over the duration of the bond’s life. What is the rate of return on his investment, if he sells this bond ten years later? 4.20% 5.04% 8.40% Not enough information to answer the question 6.72%
1) Please describe the meaning of diversification. How does diversification reduce risk for the investor? 2)...
1) Please describe the meaning of diversification. How does diversification reduce risk for the investor? 2) How do investors measure the risk of individual common stocks? 2) How do investors measure the risk of individual common stocks?
Risk and Rates of Return: Stand-Alone Risk Stand-alone risk is the risk an investor would face...
Risk and Rates of Return: Stand-Alone Risk Stand-alone risk is the risk an investor would face if he or she held only _________________ . No investment should be undertaken unless its expected rate of return is high enough to compensate for its perceived _________________ . The expected rate of return is the return expected to be realized from an investment; it is calculated as the _________________ of the probability distribution of possible results as shown below: The _________________ an asset's...
In finance terms, what is risk? How does risk impact investor behavior and shape the expected...
In finance terms, what is risk? How does risk impact investor behavior and shape the expected return an investor might have for a particular security? How does diversification help deal with risk? Be specific in discussing the benefits of diversification.
In finance terms, what is risk? How does risk impact investor behavior and shape the expected...
In finance terms, what is risk? How does risk impact investor behavior and shape the expected return an investor might have for a particular security? How does diversification help deal with risk? Be specific in discussing the benefits of diversification.
• Part 1: Describe a bond issued at face value. Explain why an investor would purchase...
• Part 1: Describe a bond issued at face value. Explain why an investor would purchase a bond issued at par instead of a bond issued at a discount or a bond issued at a premium. (1-2 paragraphs)
What is a junk bond and how does an investor profit from the purchase of a...
What is a junk bond and how does an investor profit from the purchase of a junk bond? Explain with examples.
An investor purchased a bond at its face value of $2500. The bond stipulates a fixed...
An investor purchased a bond at its face value of $2500. The bond stipulates a fixed nominal interest rate of 8% per year, paid quarterly, over its 5 year life. The investor is thinking about selling the bond after four years for $2200. A) Draw out the cash flow diagram illustrating this situation (either manually or using Excel). B) Determine the quarterly IRR, the nominal rate of return, and the effective rate of return if the bond is sold after...
An investor purchased a bond at its face value of $2500. The bond stipulates a fixed...
An investor purchased a bond at its face value of $2500. The bond stipulates a fixed nominal interest rate of 8% per year, paid quarterly, over its 5 year life. The investor is thinking about selling the bond after four years for $2200. a.Draw out the cash flow diagram illustrating this situation (either manually or using Excel). b.Determine the quarterly IRR, the nominal rate of return, and the effective rate of return if the bond is sold after four years....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT