11. Behaviour of the Markets Flashcards
Higher risk requires…
higher return
What are government bond cash flows suitable to match?
Annuity business
What is the risk profile of a government bond
Secure & low risk
What 2 factors can impact the term of the government bonds issued. Give an example for each
Supply - in times of fiscal deficit, the government will issue more bonds
Demand - some bond durations are more marketable than others depending on asset-liability matching
Why are corporate bond yields higher than government bonds?
Risk premium
Name the 4 risks corporate bonds are exposed to over government bonds
- Default risk
- Inflation risk
- Marketability risk
- Liquidity risk
________ return is higher on a corporate bond than on a government bond
Expected
How can corporate bond holders eliminate both marketability & liquidity risk?
By matching exactly to maturity, meaning they won’t need to sell the bond
Are equities considered a real investment?
Yes - dividend growth is generally in-line with inflation
What risks are equities exposed to? (5)
- Default risk
- Marketability risk
- Liquidity risk
- Contagion risk
What’s contagion risk (aka systemic risk)?
Risk that difficulty in one equity will spill over into the wider financial system
Why are guarantees & investment options so much more capital intensive?
Regulators require capital to be held against them
On the supply-demand curve, which is the top line, which is the bottom line & what are the titles of the axes?
Top: Supply
Bottom: Demand
x: Quantity
y: Price level
Why is demand for various investment classes so price elastic?
There exists many very close substitutes
What is the main driver of demand for a particular investment class?
Investor expectation of risk vs return
