Why owning bonds is risky

Reference no: EM13204216

1. Many think that owning bonds is not risky. List and briefly explain two specific reasons why owning bonds is risky.

2. Explain how an investor's risk aversion is reflected in a bond's maturity risk premium.

3. Would an increase in the volatility of long-term interest rates cause a bond investor to pay more or less for a non-callable bond that had high convexity? Briefly explain your answer.

4. When computing a bond's ex ante yield to maturity two assumptions are made. List and briefly explain these two assumptions (assume the bond is non-callable).

5. Say you purchase a callable bond for $X. Explain how you are simultaneously selling a call option.

6. With words only explain how reinvestment rate risk on a long-term non-callable bond might cause the bond's ex ante YTM to differ from its actual YTM. (This question is focusing on the bond's interest payment cash flows, not reinvestment of principal.)

7. Explain how a long-term bond's price is impacted in opposite directions when the required rate of return on the bond rises.

Reference no: EM13204216

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