1. A widening of default risk premiums is considered a positive sign for future
ID: 2787876 • Letter: 1
Question
1. A widening of default risk premiums is considered a positive sign for future economic prospects.
True/False
2. A convertible US$ bond could not have a yield greater than a US government bond with the same maturity.
True/False
3. The yield on overnight repurchase agreements (repos) is generally lower than the corresponding fed funds rate.
True/False
4. Which of the following bond options would increase the bond’s required yield? I. callable, II. convertible, III. putable
a. I only
b. II only
c. I and III only
d. II and III only
e. all of the above
f. none of the above
5. A ______ is a short-term loan secured by a money market instrument.
a. commercial paper
b. fed funds
c. certificate of deposit
d. repurchase agreement
e. all of the above
f. none of the above
Explanation / Answer
1) False. A widening of default risk premium implies an increase in probability of default, which is a sign of poor economic prospects.
2) True. Typically, convertible bonds have yields lower than the straight bond given the option available to convert.
3) False. Repos are higher due to counter-party risk.
4) I only. Putable and convertible benefits the bondholder and hence, they reduce the required yield.
5) d appears plausible. Repurchase agreement is short-term collaterized loan.