Question

Multiple Choice Fundamentals of Bond Valuation & Bond Analysis

44. An attempt to relate bond yields from 1968-1991 to the Standard and Poor's 500 found

(a) no relationship.

(b) investment grade bonds had the largest beta.

(c) bond yields were more volatile than stock yields.

(d) over 90% of bond yield variance is explained by the stock market variance.

(e) lowest rated bonds had the largest beta.

45. Bond rating systems

(a) report levels of risk relative to other bonds.

(b) have little relationship to the actual risk.

(c) reclassify all bonds when the economy changes.

(d) maintain a fixed yield spread between rating levels.

(e) report a level of risk related to historic, absolute standards.

Answer 1

44. An attempt to relate the bond yields from 1968 – 91 to the Standard and Poor’s 500 found that lowest grade bonds have large beta. This is because the beta of a bond implies its volatility in the market. If a bond has high volatility then the value of beta will be more and vice versa. Such bonds with low volatility will get investment grade rating and bonds with high volatility will get high rating. So, the correct answer is option e.

45. Bond rating system reports the level of risk related to absolute and historic standards. This is the system that makes the investors aware about whether they should invest in a bond or not based on the risk involved in the bond. The correct answer is option e.