Question

1. Which of the following are considered bearish economic events? (More than one answer or no answers may be correct)

1. Interest Coverage Ratios are decreasing
2. Defined Contribution Funds are increasing
3. The Fed buys $5m in t-bonds
4. The VIX is decreasing
5. Credit Default Swaps are becoming more expensive

2. Which of the following are designed to either lower or offset risk for a bondholder? (More than one answer or no answers may be correct)

1. TIPS
2. Credit Default Swaps
3. Premium bonds
4. Convertible bonds
5. Senior bonds

Answer 1

1. Which of the following are considered bearish economic events?

Answer 1:

a) Interest Coverage Ratios are decreasing - Yes, this is an indication of bearish economic event as the companys' interest remaining the same, the EBIT is decreasing. This will soo result into the companies getting default and bankrupt.

e) Credit Default Swaps are becoming more expensive - Yes, this is an indication of bearish economic event as this indicates people are buying more and more CDS, and thus they are expecting the companies to default causing bearish economy.

2. Which of the following are designed to either lower or offset risk for a bondholder?

Answer 2:

a) TIPS - Treasury Inflation-Protected Securities (TIPS) are Treasury bonds that are adjusted to eliminate the effects of inflation on interest and principal payments, as measured by the Consumer Price Index (CPI). Thus, it will save the bond-holder from the risk of default in case of rise in interest rates.

b) Credit Default Swaps - A financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement. Thus, it will save the bond-holder in case the company defaults on the bond.