Question

T/F

a. The one-year default rate on junk bonds reached double-digits in 1991 and has never since exceeded even 4%. ____

b. The one-year default rate on investment-grade debt averages about 2%. _____

c. Most defaults occur in recessions when investment-grade firms experience a large drop in revenue._____

d. A bank that buys the CDX North America contract can reduce its transactions costs relative to buying protection on all 125 single reference names.___

e. The typical spread on a junk bond is 400 bp whereas the typical CDS premium on a junk bond is only 50 bp. ___

f. A 30 noncall life bond will experience a larger increase in value than a 30 noncall 0 bond when interest rates fall 1%. _____

Answer 1

a. The one year difficult rate on junk bond has never reached more than 4%, after it has reached 10% in 1991. The given statement is TRUE.

b. The given statement is FALSE because 1 year default rate on investment averages more than 2%.

C. The given statement is TRUE as most default occur in recession when investment-grade firm experience the large drop in revenue.

D. The given statement is FALSE because it cannot reduce its transaction cost, related to buying protection on all 125 single reference names

E. The given statement is TRUE because the spread on junk bond is higher.

F. The given statement is also TRUE because the 30 non call life bond will experience larger increase in value.