CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which of the following is NOT evidence of the fact that investors are risk-averse?

I. Investors purchase various types of insurance.
II. The promised yield for different grades of bonds that supposedly have different grades of credit risk is different.
A. I only
B. II only
C. Both are evidence of risk aversion.

User Contributed Comments 3

User Comment
superjam i would have thought that given the same coupon, low grade bonds have a lower expected return relative to face value since they have a greater chance of default - and (obviously) no chance of returning more than coupon. Therefore a risk _neutral_ investor would pay less (=higher yield) for these lower grade bonds. WHY AM I WRONG?
Rotigga Your assumptions are wrong. Lower grade bonds have a HIGHER coupon than bonds with a higher credit quality. Coupons and credit quality are inverse-- the higher the credit quality, the lower the coupon offered. So when you buy a low credit quality BBB- bond, you are compensated for taking the risk with a higher coupon.
prachirp good explanation.
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