Inside the company fixed income managers bought bonds but they did not keep them for very long at all. Instead, they were constantly buying, exchanging and selling the bonds in their portfolios” Explain why the behavior described in the above quote may happen in terms of interest-rate risk immunization and downgrade risk. Do not discuss speculation or arbitrage as causes of this behavior as these will not gain any credit in this examination.

Inside the company fixed income managers bought bonds but they did not keep them for very long at all. Instead, they were constantly buying, exchanging and selling the bonds in their portfolios” Explain why the behavior described in the above quote may happen in terms of interest-rate risk immunization and downgrade risk. Do not discuss speculation or arbitrage as causes of this behavior as these will not gain any credit in this examination.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 3MCQ

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Investment Banks operate and earn profits by: a) Purchasing undervalued securities on the market b) Creating and marketing new financial securities for issuers. c) Underwriting existing security issues, and selling them at a discount. d) Issuing stocks and bonds based on their own credit. e) Purchasing and reselling existing undervalued stocks and bonds. f) None of the other answers.
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Which of the following statements is false? A. Credit spreads narrow during an economic recession. B. Credit spreads tend to narrow as broker-dealers become more willing to provide capital. C. Less creditworthy issuers are subject to high market liquidity risk. D. None of the above.
Nhich of the below statements is TRUE? O a. Frequently, the ability of an issuer to make interest and principal payments is seriously and unexpectedly changed by a naturai or industrial accident or some regulatory change. O b. The lowest-grade bonds are designated by Moody's by the symbol Aaa and by the other three rating systems by the symbol AA O . Fixed-rate securities are attractive to some institutionial investors because they allow them to buy an asset with an income stream that closely matches the floating nature of the income of some of their liabilities. O d. Each rating agency periodicalily publishes a table showirig the upgrade and downgrade history of the issues that it rated.
18- which of the statements given below is false? Please select one; a) a financial intermediary borrows funds from people who have saved b) in a bull market stock prices are rising on average c) interest rates can be accurately described as the rental price of money d) a stock is a debt security that promises to make periodic payments for a specific period of time e) banks are financial intermediaries that accept deposits and make loans
Which of the following statements is correct? A. Investors appreciate illiquid assets in their portfolios as they can easily sell them off to cover margin calls. B. Liquid assets can quickly be converted into cash without changing prices too much. O C. Corporate bonds are among the most liquid financial assets as they trade at a very high frequency. D. Liquid assets tend to be cheaper as investors are not willing to pay for their liquidity benefits.
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Which of the following statements is false? A. Banks have high levels of liquidity assets and stable funding since the financial crisis. B. Compared with bonds with short-term duration, bonds with long-term duration have uncertainty regarding future creditworthiness. C. Expected loss can decrease with an increase in a bond’s recovery rate. D. Macaulay duration is calculated as modified duration divided by one plus the bond’s yield to maturity.
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You do not need to provide the reason for your answer. 6. In a strong form efficient market, it is possible for investors to obtain abnormal returns by trading on publicly available information. * True False 7. Capital raising is how a business obtains money for operations and investments. The two main sources are issuing preference shares and issuing ordinary shares. True False 8. The interest-only loan allows borrowers to pay interest only for an agreed period. After that, it requires them to pay higher repayments./ True False 9. Initial public offering (IPO) is when a company is trading outstanding ordinary shares in the exchange market. True False 10. Venture capitalists can reduce their investment risk by using stage funding, requiring entrepreneurs to make a personal investment, and syndicating with other venture capitalists. " True False
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