Under which of the following circumstances do investors use bond indexes as a benchmark?

[patso]

A When they used borrowed cash to do investments
B When they have no specific liabilities to satisfy
C When volatility of the stock index is high
D During a bear market
E During a bull market
PLEASE EXPLAIN ANSWER.

 

[Galli]

I’m going to say B but I think a better answer would be whether or not the manager can actually replicate the bond index.

 

[Godism17]

I would say A. If you are borrowing cash, the lenders are charging you an interest rate plus a spread or just a fixed rate. You can then find a comparble bond index to match that cost and see if you can beat it. If your investments do better than your bond like borrowing costs, you’re rolling $$$, it’s a good day.

 

[patso]

The answer is B. and the prep provider answer explanation is “In general, if investors have no specific liabilities, they will use a bond index benchmark.” but i dont get it.

 

[cpk123]

if investors had a liability that they had to satisfy - they would use a liability relative benchmark (ALM if you will) - and unless the bonds in the index matched the liabilities - a general bond index would not satisfy that requirement.