QUESTION 9 Which statement is correct? The higher the probability of default, th

Question

QUESTION 9 Which statement is correct? The higher the probability of default, the lower the yield to maturity will be Short-term bonds have lower reinvestment rate risk than long-term bonds Long-term bonds have more interest rate risk than short-term bonds OAll else equal, if a bond s yield to maturity increases, its price will increase OIf a coupon rate exceeds its bond s yield to maturity, the bond will sll at a discount over par bond will sell at a discount over par QUESTION 10 Which of the following is true: yield curve indicates that yields on long-term bonds are higher than yields on short-term bonds O None of these An inverted yield curve is historically a sign of imminent recession. An inverted yield curve is not possible O An inverted yield curve is historically a sign that the economy is expected to improve

Explanation / Answer

9.

If probability of default is high then yield on bond must be higher. for shorter term bond have higher reinvestment risk. interest rate risk is high for longer maturity bond than shorter term bond. The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decreases and when interest rate falls bond price increase.

So, Option (E) is correct answer.

10.

Yield curve is inverted when short-term yield on bond is higher than long term yield on bond. Downward Yield curve mean there is chance of chance of recession in economy and that why investor has very less confidence on economy.

Option (B) is correct answer.

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