Liquidity risk, default risk, and taxability risk

Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond?

2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction?

3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required for a downward-sloping yield curve to exist.

4) Should investors be indifferent between two bonds which have equal market yields to maturity as long as the bonds have the same bond rating? Can you think of any real-world factors which might make a given investor prefer one of these bonds over the other?

Sample Solution

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