Question

9. More on types of bonds You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are traded in the bond markets based orn investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds have a claim on assets only after senior debt has been paid in full. These bonds are collateralized securities with first claims in the event of bankruptcy. Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? o BBB bonds usually have the lowest yields in the bond markets. U.S. government bonds usually have the lowest yields in the bond markets. In 2008, the United States began to witness one of the worst recessions since the 1930s. The collapse of the housing bubble in 2006 led to a massive decline in real estate prices, affecting consumers and institutions, especially banking and financial entities. Severe liquidity shortfalls in the United States as well as other global markets led to a serious credit crisis. During the credit crisis of 2008-2009, several banks and other businesses went through a reorganization process or were forced to liquidate. Consider the following example:

Answer 1

These bonds are traded in the bond markets based on investors’ belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. - DEBENTURES

These bonds have a claim on assets only after senior debt has been paid in full. - SUBORDINATED DEBENTURES

These bonds are collateralized securities with first claims in the event of bankruptcy. - SENIOR MORTGAGE BONDS

BBB bonds usually have the lowest yields in the bond markets - THE STATEMENT IS FALSE BECAUSE BBB bonds ARE THE SAFEST AND HIGH YIELDING BOND IN COMPARISON TO OTHER BONDS.

US government bonds usually have the lowest yields in the bond markets. - THE STATEMENT IS TRUE BECAUSE BEING THE NO INTEREST RATE PREVAILING IN THE US MARKET, THE US GOVERNMENT BONDS ARE YIELDING LOWEST.

THE GIVEN CASE IS AN EXAMPLE OF LIQUIDATION