A US investor who purchase an option-free bond with a 7% coupon rate maturing in 20 years, and issued by a US based company is most likely exposed to: A: volatility risk and credit risk B: event risk and interest rate risk C: volatility risk and yield curve risk Correct answer is B. I answered A. Why wouldn’t A be the better answer? The question implies a non-governmental bond with some measure of credit risk, meaning a possible downgrade (which narrows the likely answer down to A). A 20 year maturity implies greater volatility or interest rate rate risk (meaning A or B). Event risk relates to something beyond simply a downgrade in credit ratings.
Option free bonds don’t have volatility risk. Only bonds with embedded options have volatility risk.
Volatility risk is assosiated with bonds with embedded options So as this is a an option free bond this will already remoive choice A and C and then we are only left with B which is the right answer But one could easily get confused with this question
ok, thanks
Remeber for bonds with embedded options have Volatility risk The more volatile the interst rates, the more is the value of “bond Option” and this affects its price…