Risk Question.

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DonYuan

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Which of the following statements about the risks associated with
investing in bonds is most accurate?
A. Corporate debentures are not subject to prepayment risk.
B. Liquidity risk is not relevant if the portfolio manager intends to hold
the bond to maturity.
C. All fixed income securities except short-term Treasury bills are subject
to volatility risk to some degree.
D. Event risk refers to the possibility that the issuer breaches one of its
debt covenants and triggers a "credit event.

I chose B, but answer was A. I look into the book and find "for investors who plan to hold a bond until maturity, liquidity risk is not a major concern".

Also, I do not understand why you cannot make prepayment on Corporate debt.
 
Weird question.

Short term treasuries are subject to volatility risk.

Wrong definition of event risk.

Liquidity is still important in case they want to mark to market.

So logically if the bond is not callable, A would be true.
 
When i saw this question it made me cringe when i saw that the answer was A. In reality, most unsecured corporate bonds are callable and thus are subject to prepayment risk. I disagree 100% with the answer to this questions.
 
Mib, unless they specify that they are callable, we cannot make the assumption. In this case, the other 3 are wrong.
 
fair enough, but i think the word "not" in the answer choice carries a meaning of never...maybe its just me.
 
prepayment is not the same thing calling a bond. prepayment only has to do with mortgages.
portfolio manager have to worry about liquidity risk because of redemptions. they might HAVE to sell a bond. or for example, even if the manager held every bond to maturity, an investor who needs money would have to get out at the current nav of the fund which may be way down.
short term treasuries are only volatile within the short time period they have to maturity (not even so much in that time period) it helps me to assume that all investors have a time horizon greater than 30 days.
 
meazza exactly. and investors have to get their money from a portfolio based on the mark to market value
 
ryanwtyler Wrote:
-------------------------------------------------------
> prepayment is not the same thing calling a bond.
> prepayment only has to do with mortgages.
> portfolio manager have to worry about liquidity
> risk because of redemptions. they might HAVE to
> sell a bond. or for example, even if the manager
> held every bond to maturity, an investor who needs
> money would have to get out at the current nav of
> the fund which may be way down.
> short term treasuries are only volatile within the
> short time period they have to maturity (not even
> so much in that time period) it helps me to assume
> that all investors have a time horizon greater
> than 30 days.


nice...just went back and looked at schwesser and there are actually two definitions for call risk and prepayment risk...thanks for clearing that up.
 
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