Market risk arises from potential losses incurred because of changes in market prices.

(a) Identify and briefly discuss four risk factors, other than market risk, that can affect the value of a bond. (40 marks)

(b) Describe what is meant by an 'inverse floater'. (20 marks)

(c) Would an inverse floater be more or less sensitive to interest rate risk than an equivalent fixed coupon bond? Explain you answer. (20 marks)

(d) Which is a better asset for a short-term fund to be used to pay salaries and other expenses, Treasury Bonds or AAA corporate bonds? Explain your answer assuming the bonds have the same maturity and similar risk characteristics. (20 marks)

Answer rating: 100% (QA)

Bond Risks Besides Market Risk a Four Bond Risks Other Than Market Risk 40 marks Credit Risk Issuer Default Risk 10 marks This risk refers to the possibility that the bond issuer may default on its ob... View the full answer