Question

a)Why would the periodic cash inflow from coupon payments be attractive to certain bondholders? In your explanation, give a simple example that illustrate your point

b)In less than 50 words, identify and discuss the possible major cause(s) of this negative return.

Answer 1

(a)

People who wants the safe and regular income from thier Investment prefers the periodic cash flow and another thing is liquidity preference that means as they receive Cashflow periodically they have feeling that they are earning something. And the regular payments of interest or the coupon give them confidence that company is very stable and will not become defaulter. and specially senior citizens prefer such securities because they need certain amount of Investment periodically because that is the bread and butter for them.

(b)

The reasons could be:-

1. Default by the security issuer

2. Reduce in the Price of security into the market

3. Downturn in economy cause the reduction in the share prices

4. Stock market crashes due to pandemic like covid

I hope my efforts will be fruitful to you.