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CFA Level 1 - Fixed Income - Risks Associated with Investing in Bonds
Intermediate
1/5
John invested in a bond issued by XYZ Corporation, which has recently been facing financial difficulties. The bond's credit rating has been downgraded, and there are concerns about the company's ability to meet its debt obligations. Which of the following risks is John most likely exposed to in this situation?
a.
Liquidity risk, as the bond may become difficult to sell in the secondary market due to the issuer's financial troubles, potentially resulting in a lower price if John needs to sell the bond before maturity.
b.
Interest rate risk, as the bond's value may fluctuate in response to changes in market interest rates, particularly given the issuer's weakened financial position and the potential for a higher risk premium.
c.
Credit risk, as the issuer's deteriorating financial condition may lead to a default on the bond's interest or principal payments.
Intermediate