CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Five years ago Brandon purchased an unrated, 30-year, 6% corporate bond from a local financial institution at par value. On the date of purchase, the financial institution acted as a dealer and was willing to both sell and purchase the specific issue. In the interim, the local financial institution has been purchased by a national concern and no longer offers bond dealer services. The level of market yields has dropped substantially since the date of purchase, and the bond issuer continues to make payments on the issue. This is an example of ______.

A. spread risk
B. liquidity risk
C. downgrade risk
Correct Answer: B

There is no readily available means to find the market price for this specific issue until another dealer that makes a market in the issue is located.

User Contributed Comments 15

User Comment
mtcfa How are we supposed to know thst this one particular firm was the only dealer of these bonds???
Done That is sooooooo true because this seems like an event risk
o123 well it should be enough to know that one less dealer still makes the market less liquid, even if only fractionally.
surob I think o123 has a good point.
chamad althoug this firm may not be the only dealer, there will be less dealers in the market for this bond thus less liquidity.
VenkatB "The level of market yields has dropped substantially since the date of purchase‚" I guess this means the bid-ask spreads are low now.--> which implies liquidity has improved. (ie: Reduced liquidity risk)
magicchip It's obvious that there is less liquidity as there is one less dealer.
natexchang its obvious because this is the section that talks about liquidity risk
Richie188 note it's an unrated, 30 years corporate bond from a local financial institution. therefore it's a low grade bond with a long maturity probably only dealt locally. to me this means liquidity risk.
DonAnd good point natexchang...lmao!!
Jurrens "market yields have dropped substantially" which would leave me to believe interest rate risk (if this question wasn't put in this section)
gmilchev I agree with Jurrens, I also would confuse it with reinvestment risk as you have to reinvest the coupon at a lower rate due to the "substantial" drop in market yields.
2014 When question says one dealer, then answer is liquidity risk
gill15 Dropped substantially would make me conlcude that it is Liquidity risk. Notes say Unexpected change in interest rates, cause a widening of the bid ask spread ---> which would therefor increase liquidity risk.....
thats how i actually got the answer and wasn't even thinking about how many dealers --- But I should've
To-be-CFA Elimination of wrong choices would have done the trick too.
You need to log in first to add your comment.