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Fixed Income MCQ - Fixed Income Section 2

36 For a single coupon bond with constant yield as time passes during the coupon period:

As time passes during the coupon period, the Macaulay duration declines smoothly and then jumps upward after the coupon is paid.

37 A rating agency has downgraded the rating of Standz Inc. As a result, the price of its bonds went down. This risk is best described as:

The change in yield spread and hence the price of the bond due to changes in credit rating can be described as credit migration risk.

38 An investor has bonds of Meck Inc. worth $500,000. He wants to sell these bonds in the market. However, he has difficulties selling the bonds and may have to sell them at lower than the market value. This can be best described as:

When the security has to be sold below its market value, the risk is called market liquidity risk.

39 Company A is identical to company B, except that B has less publically traded debt outstanding than A. Hence, B is most likely to have:

Market liquidity risk is increased by less debt outstanding.

40 An analyst is studying a portfolio’s credit risk. Which of the following is the analyst least likely to consider as a credit-related risk?

Currency risk is not a credit-related risk.

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Money Duration

Money duration converts percentage price sensitivity into a currency amount. It estimates the approximate change in a bond's value for a small change in yield.

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Question:

Which of the following is least likely to be a component of credit risk?

A. Default probability.
B. Loss severity.
C. Price trajectory.

Correct answer: C

Explanation:

The two components of credit risk are default probability and loss severity.

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