An insurance company prefers to invest in high quality bonds with a long maturity date Why may the annual return on this investment fluctuate a lot for the insurance company? and How can the insurance company minimize the final capital loss on this investment?
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An insurance company prefers to invest in high quality bonds with a long maturity date
Why may the annual return on this investment fluctuate a lot for the insurance company? and
How can the insurance company minimize the final capital loss on this investment?
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Solved in 4 steps
- Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?If investors are uncertain that a corporate bond issuer will make all of the bond payments as promised, the investors will demand a higher yield in the form of: Select one: a. An increased real rate of interest. b. An increased interest rate risk premium. c. An increased default risk premium. d. An increased inflation premium. e. An increased liquidity risk premium.
- You want to invest in a company that guarantees your money's interest payments and returns at the maturity date as an investor. Which is the best option for this investment? a. bonds b. stocks c. stocks and bonds d. neither stocks nor bondsWhen you have a fixed investment horizon, it is important to maximize your earnings. You must understand the risks and returns of the security and the risk factors that can affect the price of the bond. If an investor has a fixed investment horizon, what type of security can be used to minimize both the price risk and the reinvestment risk? Does this security protect the real payoff? Explain.Long-term bonds fluctuate more than short-term bonds as interest rates rise, making them a riskier investment. When interest rates rise, bond prices fall. A bond's coupon rate or interest rate determines the annual payment to the issuer. what does this mean?
- Before the financial crisis, mortgage-backed securities were considered to be very safe investments. Later, the underlying risks associated with these securities were fully realized, and they were found to be much riskier than initially thought. What impact does this new information have on the demand for these assets? A. Quantity demand did not change B. Quantity demand declined C. Quantity demand increasedWhen the yield curve becomes inverted and slopes downard, it is an indicator of: a) A coming economic boom because investors are being compensated at higher yields for the added risk of investing in longer-term bonds b) Little economic difference because the yield curve will only matter if it effects corporate strategic investment c) A coming recession because it shows investors want to tie up their money longer, even if it provides a lower annual rate of returnFor the holder of a fixed-rate coupon bond, reinvestment risk is a bigger problem during a period of falling interest rates than during a period of rising interest rates. Why, Explain.
- Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The interest rate risk premium always adds a downward bias to the slope of the yield curve. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.Interest rate risk is the potential for investment ( ) that result from a change in interest rates. If interest rates ( ) , for instance, the value of a bond or fixed-income instrument will decline.
