CH8. Risks Flashcards
If you invested php 1,000,000 in a Treasury Bill with a 6% p.a. yield and inflation was 3%, your real return is:
(a) 9%
(b) 6%
(c) 3%
(d) 12%
(e) None of the above
(c) 3%
The risk that an investment’s value will change due to a change in
absolute level of interest rates
(a) credit risk
(b) liquidity risk
(c) sovereign risk
(d) price risk
(e) default risk
(d) price risk
Country A unexpectedly decided to “nationalize” the utility industry, i.e. barring foreign ownership. The price of the bond issued by this country will probably:
(a) go up because of political risk
(b) decline because of reinvestment risk
(c) increase because of liquidity
(d) go down because of sovereign risk
(e) none of the above
(d) go down because of sovereign risk
Which of the following statements are false?
I. Government issued securities are almost risk free
II. Corporate Bonds are more likely to default than bonds
issued by the Government
III. Assuming the same tenor, coupon and features: Treasury bonds, unsecured corporate bonds, secured bonds are ranked lowest to highest risk
(a) I only
(b) IandII
(c) II only
(d) I, and III
(e) III only
(e) III only
The amount by which the rate of return on a risky investment exceeds the rate of return on a less risky investment is known as:
(a) coupon rate
(b) credit spread
(c) real income
(d) risk premium
(e) net income
(b) credit spread
Based on the following table of historical average nominal returns over the past 20 years, what is the risk premium of a 10 year corporate bond over the risk-free Treasury bills?
Treasury bills - 4.50%
5 year government bonds - 5.25%
10 year government bonds - 6.00%
10 year corporate bonds - 6.50%
(a) .50%
(b) .75%
(c) 1.50%
(d) 2.00%
(e) 11.00%
(d) 2.00%
Investments in Hybrid Tier 1 (HT1) capital is more risky than investing in Lower Tier 2 (LT2) because:
(a) HT1 can be denominated in foreign currency
(b) HT1 has a fixed coupon
(c) LT2 holders have priority over HT1 holders in terms of ranking during liquidation
(d) HT1 has a step up coupon feature
(e) None of the above
(c) LT2 holders have priority over HT1 holders in terms of ranking during liquidation
In a liquidation, investors get paid in which order?
(a) Preferred, bond, common
(b) Preferred, common, bond
(c) Bond, common, preferred
(d) Bond, preferred, common
(d) Bond, preferred, common
What are investment grade bonds for S&P?
(a) BtoA
(b) BBtoAA
(c) BBB to AAA
(d) AtoAAA
(e) None of the above
(c) BBB to AAA
What are below investment grade bonds for S&P?
(a) AAAtoC
(b) BaatoC
(c) BBtoD
(d) CCCtoD
(e) None of the above
(c) BBtoD
Which of the following bond would match the risk appetite of an investor with a high risk tolerance and is willing to lose part of his principal for highest yield?
(a) AAA Corporate bonds
(b) Treasury securities
(c) Corporate Bonds
(d) Subordinated Debt
(e) None of the above
(d) Subordinated Debt
Bonds with which set of ratings below generally have the greatest yield?
(a) AAA or Aaa
(b) BBB or Baa
(c) CCC or Caa
(d) C or D
(d) C or D
Which risk should an investor with a fixed income portfolio be most concerned about during periods of falling interest rates?
(a) Credit risk
(b) Reinvestment risk
(c) Price risk
(d) Sovereign risk
(e) All of the above
(b) Reinvestment risk
Government securities issued and denominated in local currency are considered almost risk free because:
(a) Governments do not fail in their local currency obligations
(b) Governments generally have positive cashflow
(c) Governments can print money
(d) Governments can easily borrow money
(e) All of the above
(e) All of the above
Sometimes the secondary market may limit the funds that can be generated from disposal of an asset because of lower demand. This is risk is known as:
(a) liquidity risk
(b) price risk
(c) default risk
(d) sovereign risk
(e) none of the above
(a) liquidity risk
