Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 3: 10-11B (page 329)

Which of the following most accurately describes the behavior of credit default swaps?

a. When credit risk increases, swap premiums increase.

b. When credit and interest rate risk increases, swap premiums increase.

c. When credit risk increases, swap premiums increase, but when interest rate risk increases, swap premiums decrease

Short Answer

Expert verified

a. The purchase of a credit default swap

Step by step solution

01

Definition

A financial swap agreement that the seller of CDS will compensate the buyer in the event of debt default is known as financial swap agreement.

02

Explanation on the behavior of credit default swaps

In the event of increase in credit risk, the swap premium increases because of higher chances of default on the firm. With the increase in the interest rate, the price of CDS decreases because the cash flows are discounted at a higher rate for bearing more risk.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

a. Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, option-free corporate bond priced at par; the bond is described in Table 11.9. Calculate the duration of the bond.

Meer is also considering the purchase of a second newly issued, option-free corporate bond, which is described in Table 11.10. She wants to evaluate this second bond’s price sensitivity to an instantaneous, downward parallel shift in the yield curve of 200 basis points. Estimate the total percentage price change for the bond if the yield curve experiences an instantaneous, downward parallel shift of 200 basis points.

Consider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity.

a. Find the bond’s price today and six months from now after the next coupon is paid.

b. What is the total rate of return on the bond?

You are managing a portfolio of $1 million. Your target duration is ten years, and you can choose from two bonds: a zero-coupon bond with a maturity of 5 years and an infinity, each yielding 5%.

An a. How much of each bond will you hold in your portfolio?

b. How will these fractions change next year if the target duration is nine years?

Question: A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond’s life.

a. Explain the impact on the offering yield of adding a call feature to a proposed bond issue.

b. Explain the impact on the bond’s expected life of adding a call feature to a proposed bond issue.

c. Describe one advantage and one disadvantage of including callable bonds in a portfolio.
See all solutions

Recommended explanations on Business Studies Textbooks

Human Resources

Read Explanation

Financial Performance

Read Explanation

Change Management

Read Explanation

Strategic Analysis

Read Explanation

Introduction to Business

Read Explanation

Nature of Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free