Which of the following statements about the risks associated with investing in bonds is most accurate? A. Corporate debentures are not subject to prepayment risk. B. Liquidity risk is not relevant if the portfolio manager intends to hold the bond to maturity. C. All fixed income securities except short-term Treasury bills are subject to volatility risk to some degree. D. Event risk refers to the possibility that the issuer breaches one of its debt covenants and triggers a “credit event.” Ans: A A. Corporate debentures are not subject to prepayment risk. (Really?) B. Liquidity risk is not relevant if the portfolio manager intends to hold the bond to maturity. (of course it is) C. All fixed income securities except short-term Treasury bills are subject to volatility risk to some degree. (I thought Volatility risk is the affect on bond values with embedded options. T-bulls have embedded options?) D. Event risk refers to the possibility that the issuer breaches one of its debt covenants and triggers a “credit event.” (This is credit risk? Credit risk in bonds is like default risk?)
As far as I know, corporate debentures don’t have provisions to prepay their obligations. They are bullet bonds (payment of principal occurs at maturity). Most corporate bonds are structured this way.
C is false. For example non T-bill option free bonds don’t have volatility risk. D. I’m not sure what that risk is called. But event risk refers to risk of unexpected events like natural disasters or political trouble.
Thanks!
i got hung up on this one too…