Question

There are many different types of bonds, some of which are quite new.  Which of the following statements are true with respect to these different types of bonds?

Select one:

a. A CAT bond is usually issued by insurance companies to move the risk of large earthquakes and hurricanes off of their Balance Sheets and into the capital markets

b. A “death bond” or life settlement account gives an aging baby boomer a chance to monetize (or sell) an existing life insurance policy for immediate cash proceeds

c. A convertible bond gives the investor both upside potential (from the conversion option) and downside protection (from the bond value)

d. A real return bond provides protection against inflation by grossing up the face value prior to the payment of each coupon.  At maturity, the investor receives the grossed up face value plus the final coupon.

e. All of the above are true statements.

Answer 1

Answer :

(e) All of the above are true statements.

Reason :

(a) True. A CAT bond ( catastrophe bond ) is a debt instrument that is issued to raise money and reduce risk for companies in the insurance industry in the event of a natural disaster.

(b) True. A person who was born between 1946 and 1964 is described by the term 'Baby Boomer'. The baby boomer generation makes up a substantial portion of the world's population, especially in developed nations. They will now be in the age range of 74 and 56. Because of Death Bond, life insurance holders (senior citizens/baby boomer category) can sell their life insurance and receive much needed cash to fund retirement or pay medical expenses while they are still alive.

(c) True. A convertible bondholder can convert the bond for equity and achieve potentially high dividends if the company is performing well at the time of trade. If the company is not performing as well as desired, the bondholder has the security of a bond and the option of cashing in the bond at the maturity date. Therefore it is said that a convertible bond gives the investor both upside potential (from the conversion option) and downside protection (from the bond value).

(d) True. Real return bond provides protection against inflation by grossing up the face value against inflation and coupon paid is calculated based on such grossed up value. At maturity also, the investor receives the grossed up face value plus the final coupon.