Why do at least some investors like to invest in asset-backed securities? Check all that apply: ☐ ABS are less risky than bonds with the same rating. It lowers their capital requirements. ☐ It gives them control over more assets. ☐ ABS often pay higher interest rates than bonds with the same rating.
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- Briefly describe why investors should buy high-quality (non-speculative) bonds based on yield-to-maturity rather than price. Shouldn't wise investors choose the lowest priced bonds they can find with suitable risk? Your Answer:Bonds that have investment-grade ratings from sources such as S&P tend to have higher interest (coupon) rates due to higher default risk. True FalseWhen you have a fixed investment horizon, it is important to maximize your earnings. You must understand the risks and returns of the security and the risk factors that can affect the price of the bond. If an investor has a fixed investment horizon, what type of security can be used to minimize both the price risk and the reinvestment risk? Does this security protect the real payoff? Explain.
- What are the principles of responsible investment and why is ESG important for generating higher investor returns? How will ESG impact bond rating? Is the yield to maturity on a bond the same thing as the required return?How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected by a greater degree than a financial institution with a greater concentration of bonds (and fewer short-term securities)?Which of the following statements is TRUE? O The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. O The corporate bond market is the most liquid bond market. O The differences in bond interest rates reflect differences in default risk only. O A liquid asset is one that can be quickly and cheaply converted into cash.
- A corporate bond's return becomes less uncertain as default risk increases. True or False. Explain your answerDebentures are expected to have a higher yield than secured bonds because the debentures are more risky and therefore less desirable. O TRUE O FALSE.Why are the bonds treated as a conservative investment? Do you think the treasury bills are risk-free assets?
- Why think that convertibles are riskier than straight bonds?d. How does the credit spread change with the bond rating? Why? (Select the best choice below.) A. The credit spread increases as the bond rating falls because lower-rated bonds are riskier. B. The credit spread decreases as the bond rating rises because higher-rated bonds are riskier. C. The credit spread increases as the bond rating rises because higher-rated bonds are riskier. D. The credit spread decreases as the bond rating falls because lower-rated bonds are riskier.Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.