Question

1. The higher variability of a company’s profitability is related to a poor bond rating

a) True                                    b) False

2. Which of the following is a source of systematic risk?

1. The departure of a firm’s CEO.
2. A crippling labor strike
3. The expiration of a patent
4. A major economic downturn

3. A company’s better bond rating is related to its lower coupon rate.

a) True                                    b) False

1. Which of the following coupon bond carries the lowest amount of interest rate risk?
   1. 3 year coupon bond
   2. 12 year coupon bond
   3. 2 year coupon bond
   4. 15 year coupon bond

Answer 1

1.TRUE. The bond ratings determine weather the bond issued by a company will default or not. If the profits of the company are variable then this transalted to poor bond ratings.

2. The systematic risk , is the risk that affects the entire economy and all the indistries and cannot be diversified away.

So, the correct option is option D. A major economic downturn affects the economy as a whole.

3. True. A bond with a good ratings, will provide security to the investors and there is a low risk of default, So, this alos relates to a lower coupon rate on the bond.

So, the correct option is a.

4. The bond with the lowest maturity has the lowest interest rate risk. Interest rate risk increases with the increasing maturity of the bond.

So, the correct option is option C.