Question

1-According to what we studied about risk, which of the following is not true? A. Diversification...

1-According to what we studied about risk, which of the following is not true?

A. Diversification lowers the risk of the portfolio B. Market risk can be entirely diversified C. Firm specific risk can be entirely diversified D. Market risk can not be diversified

2-

A bond with a par value of $1000 that is trading at $1200:

A.

is a par bond
B.

is a discount bond
C.

is a premium bond
D.

doesn't exist because nobody would want to buy a bond for 1200 that ultimately will pay 1000 at maturity
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Homework Answers

Answer #1

Question 1: The correct answer is B. Market risk can be entirely diversified

The market risk refers to the systematic risk which relates to the change in interest rates, political risk and economic factors etc, these types of risk cannot be entirely diversified because these are beyond the control but this can be hedged against various options.

Question 2: Premium Bonds

When the bond trades in market more than the face value of the bond then it is called premium bonds, The main reason for this scenario is coupon rate is higher than interest rate. The bond value is the present value of all the cash flows that the bond id going to generate over the lifetime and the rate we use is the market interest rate, when it is lower the present value of bonds tends to be higher than the face value.

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