Description
Q1. What factors would you consider in deciding whether or not to invest in a corporate versus a government bond
Q2. Do credit rating agencies do a good job at assessing credit risk?
Q3. Why is short selling seen as a problematic practice?
Q.4. Discuss the respective roles of primary and secondary capital markets in the financial system and outline the role of investment banks within them. What potential problems may arise if the investment bank is part of a larger bank that also includes a retail bank?
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Explanation & Answer
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Finance Question
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Finance Question
Question One
Investment is a crucial step in every organization. However, before investing in a
corporate or a government bond, individuals should consider some factors. For instance, the risk
tolerance level. It is essential for an investor to perform a risk-disposition and self-assessment
(Daniel, 2021). This determines the extent of risk one is willing to take when investing in bonds.
However, the inability of investors to identify how much risk they intended to take or avoid
makes them fail in merging the overall strategies. Additionally, factors within the risk profile
significantly impact investors' decisions (Strategic, 2021). They include the potential cost for
each risk, the overall target returns for the investment, and the negative effects of the failed
investments.
Moreover, the investors must consider keeping and sustaining the bond until maturity.
Maturity is essential in evaluating the interest rate and sensitivity of a bond. Bond maturity is
dictated in the bond indenture, which describes how the bond works and related information.
Call risk enable issuer to withdraw their bond earlier depending on rising market prices.
Furthermore, it is utilized in predicting whether the bond has any call date prior to maturity or
how the lender can make a responsible call (Daniel, 2021). Investors can easily lose the money
they have invested if they sell the bond before maturity for a lesser amount than the initial
payments.
It is important to investigate and determine whether bond coupons have a constant or
floating interest rate (Strategic, 2021). In most instances, fixed coupons provide a set ratio
related to the face value interest payment. The floating rate bond issues a variable coupon rate
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connected to a specific benchmark rate. However, when the investment has a floating rate or
variable interest rate, implies that ...