Which of the following statements is the most accurate? A. Corporate debenture is not subject to prepayment risk. B. Liquidity risk is not relevant if the bond is held to maturity. C. Event risk refers to the possibility that the issuer breaches one of its debt covenants and triggers a credit event. My answer is B but the correct is A. Schweser explains that only amortizing bond has prepayment risk. I agree that even the bond is held to maturity, liquidity risk is still a concern if the portfolio is marked to market. However, debenture is simple uncollateral bond not option free bond. B seems to be the best answer. So Schweser is wrong or i am? Please anyone has come across this question!
I would have chosen A using elimination method though I don’t concur the answer too…unless someone tell me corporate debenture does not have those sinking fund or refundable option.
liquidity risk would always be present, wouldn’t it? It is the risk of being able to dispose off the holdings – which would be present whether today, or you held the debenture to maturity.
Partly. Of course you are able to dispose the holdings, the question is at what price? If it is not liquid, you will suffer a loss (maybe due to the bid-ask spread).
Liquidity risk IS relevant if the bond is held to maturity one of resaon is for Mark to Market purposes, if there is not much liquidity in the marketfor that bond, then it wouldnt be fairly valued and which means it may be valued lower than a simuilar bond which has greater liquidity