SS10: R25: Q29.E: page 161:
I thought the credit risk is the bond that the manger purchased, could defult, so he won’t be able to sell it to cover the borrowing cost…
dont get your question, what you seem to say is what the answer was, and it is correct
the point being, if you give me a loan, and i give you my house as collateral, you are still exposed to my credit risk because the collateral i have you may lose value
thats why banks give loans for like half the property value, \
now you want to think of credit risk in terms of bond defaulting, okay no problem, however for a lender the primary source of payment is the borrower and not the collateral, good lenders never lend if the expected repayment would come from collateral, my first week in a bank i approved a shity construction loan cause the property value is 10 times the loan we gave, got called into the big mans office and taught the first rule of banking
The bond dealer is the lender, the collateral it holds (eg, Treasuries) could lose value in 30 days.
By the way, return on equity of Q29.A = 0.5% doesn’t look intuitive to me.