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Basic Question 4 of 20
Five years ago Brandon purchased an unrated, 30-year, 6% corporate bond from a local financial institution at par value. On the date of purchase, the financial institution acted as a dealer and was willing to both sell and purchase the specific issue. In the interim, the local financial institution has been purchased by a national concern and no longer offers bond dealer services. The level of market yields has dropped substantially since the date of purchase, and the bond issuer continues to make payments on the issue. This is an example of ______.
B. liquidity risk
C. downgrade risk
A. spread risk
B. liquidity risk
C. downgrade risk
User Contributed Comments 15
| User | Comment |
|---|---|
| mtcfa | How are we supposed to know thst this one particular firm was the only dealer of these bonds??? |
| Done | That is sooooooo true because this seems like an event risk |
| o123 | well it should be enough to know that one less dealer still makes the market less liquid, even if only fractionally. |
| surob | I think o123 has a good point. |
| chamad | althoug this firm may not be the only dealer, there will be less dealers in the market for this bond thus less liquidity. |
| VenkatB | "The level of market yields has dropped substantially since the date of purchaseâ" I guess this means the bid-ask spreads are low now.--> which implies liquidity has improved. (ie: Reduced liquidity risk) |
| magicchip | It's obvious that there is less liquidity as there is one less dealer. |
| natexchang | its obvious because this is the section that talks about liquidity risk |
| Richie188 | note it's an unrated, 30 years corporate bond from a local financial institution. therefore it's a low grade bond with a long maturity probably only dealt locally. to me this means liquidity risk. |
| DonAnd | good point natexchang...lmao!! |
| Jurrens | "market yields have dropped substantially" which would leave me to believe interest rate risk (if this question wasn't put in this section) |
| gmilchev | I agree with Jurrens, I also would confuse it with reinvestment risk as you have to reinvest the coupon at a lower rate due to the "substantial" drop in market yields. |
| 2014 | When question says one dealer, then answer is liquidity risk |
| gill15 | Dropped substantially would make me conlcude that it is Liquidity risk. Notes say Unexpected change in interest rates, cause a widening of the bid ask spread ---> which would therefor increase liquidity risk..... thats how i actually got the answer and wasn't even thinking about how many dealers --- But I should've |
| To-be-CFA | Elimination of wrong choices would have done the trick too. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
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Learning Outcome Statements
describe credit risk and its components, probability of default and loss given default
CFA® 2024 Level I Curriculum, Volume 4, Module 14.