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Return on Financial Assets - Math Problem Example
Author : bbarrows
Pages 4 (1004 words)
Consider the following four debt securities, which are identical in every characteristic except as noted: W: A corporate bond rated AAA X: A corporate bond rate BBB Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y 1…
tainty (low risk). In other words, invested money can earn higher profits only if there is a possibility of it being lost. Likewise, a corporate bond has several risks attached to it such as term to maturity risk, degree of liquidity risk and its credit rating. Each bond is discussed below with regard to the risk attached to it. I. Bond X will earn the highest return because of low credit rating which means that agencies regard this firm as highly risky. Moreover, it also involves maturity risk and degree of liquidity risk which is assumed as it is not stated. II. Bond W will earn a lower return in comparison to X but higher than Y and Z, as it is rated better by the rating agency which denotes low risk in terms of business operation. However maturity and liquidity risk exists which makes investor hesitant to take it unless it offers required return for it. III. ...