Topic_12_E1 - Topic 12 Exercise 1 Bond Prices and Yields...

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Topic 12 Exercise 1 Bond Prices and Yields Rising Junk Bond Yields: Liquidity or Credit Concerns? Economists look for signs of the economy’s current and future performance in the bond market. The spread in the yields between junk bonds and default-free Treasury securities may prove useful in predicting economic performance. That’s because junk bonds are issued by firms with marginal credit quality that are more vulnerable to changes in economic conditions than investment-grade borrowers. Junk bonds are also called high- yield bonds because they carry significantly higher interest rates to compensate investors for bearing the higher risk that is inherent in these bonds. Read the article on the recent junk bond yield increases and then answer the following questions: 1. Describe the two components of the junk bond yield. Define the two main risk components of the junk bond yield. The default-free bond yield refers to the rate of return for holding a similar maturity default-free bond—usually represented by Treasury securities. Compensation for the
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Topic_12_E1 - Topic 12 Exercise 1 Bond Prices and Yields...

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