Fixed Income Question

Which of the following statements is TRUE? A) When a rating agency downgrades a security, the bond’s price usually falls. B) Default risk is important because if a bond issuer defaults, the bondholder likely loses his entire investment. C) Technical default usually refers to the issuer’s failure to make interest or principal payments as scheduled in the indenture.

answer is probably C, but A is true to true as well. so what one is ‘more’ true it’s not B

A B) Bond holders will almost never lose their entire investment. There will be some portion recovered. C)A technical default is a violation of debt covenant(s). It should read Debt Service Default…

A - yes B - can recoup some as he’s a creditor C - technical default has more to do with violation of convenants

hahaha, nice timing. is everyone doing Fixed Income atm or something??? :slight_smile:

I’m pacing through it right now. I have half of FI to finish going through.

Doing 63 atm. 3:43 am, so hopefully i can knock a bit out before i knock myself out. How you doing? you doing EOC q’s / qbank etc ?? I’ve got q-bank, just running through, but getting everything >70% - some 100%. Damn deceptive this thing. I’ll come back for the CFAI EOC Q’s in a week or so. Then we’ll know the truth :slight_smile:

A, without a doubt

A The market will likely demand a higher yield from the downgraded bond (the risk premium has increased) and thus the price will likely fall. Technical default usually refers to an issuer’s violation of bond covenants, such as debt ratios, rather than the failure to pay interest or principal. In the event of default, the holder (lender) may recover some or all of the investment through legal action or negotiation. The percentage recovered is known as the recovery rate.

nice cut n’ paste job sreeharimenon