Question

T/F

g. Over ninety percent of defaulted bonds were investment grade at the time of default.

h. The average recovery rate for senior debt on a defaulted bond is 55 to 65%.

i. Credit spreads are the difference between the contract return and the risk-free rate.

j. The swap buyer pays out when the reference bond defaults.

k. Most call options are exercised when rates increase.

l. A putable bond gives the issuer the right to buy the bond back at a predetermined price.

Answer 1

g. False

Investment grade are less likely to get default as they are more secured in nature.  On contrary, high yield bonds or corporate bonds are more exposed of getting default as they are risky in nature.

h.True

The answer is true because the average recovery rate depends on the whether the senor bond is secured or unsecured. Secured senior bonds have high recovery rates and unsecured senior bond have low recorvery rates, but on an average it moves around 55 to 65%.

i. Answer is false

Credit spreads are the difference between the yield of silmilar type of bonds but with different credit quality. Credit spread are based on the basis point ie. 1% difference in yield equals to 100 basis points.

j. Answer is true

Credit Swap acts like an insurance to the buyer as it protects against the default of refernce bonds.

k. Answer is true.

When the interest rate rises, it benefits the call option in the form of savings.

l. Answer is True

The puttable option will lead to bondholder to sell back the bonds to the issuer.