Asked by Shriyam Jairath on Jun 04, 2024
Verified
Explain liquidity, default risk, and interest rate risk premiums.
Liquidity
The ability of an asset to be quickly converted into cash without significantly affecting its price.
Default Risk
The possibility that a borrower will fail to meet the obligations of a loan agreement.
Interest Rate Risk Premiums
Additional returns demanded by investors to compensate for the risk of fluctuating interest rates.
- Elucidate and describe the concepts of interest rate risk premium, liquidity premium, and protective covenants.
- Describe how various interest rate scenarios affect the values and returns of bonds.
Verified Answer
MB
Manoo BhattJun 06, 2024
Final Answer :
Liquidity problems exist in thinly traded bonds, default risk is the likelihood the corporation will default on its bond obligations, and the interest rate risk premium reflects the fact that bonds with differing coupon rates and maturities are subject to differing levels of risk associated with changes in interest rates. If any of these exist, investors will demand to be compensated for the risk by demanding a yield premium to own the bonds.
Learning Objectives
- Elucidate and describe the concepts of interest rate risk premium, liquidity premium, and protective covenants.
- Describe how various interest rate scenarios affect the values and returns of bonds.