Answer to Question #170034 in Economics for Lewis

Question

Question Six

(a)  All investments offer a balance between risk and potential return.  The bond market is no exception to this rule.

(i)                Discuss reasons why bonds are considered less risky than stocks.   (8 marks)

(ii)             Explain determining factors which make bonds a high yielding and perfect choice for investors.                                                                                             (5 marks)

(b)  Describe the risks associated with investing in government and corporate bonds.    

    (5 marks)

Explain the term ‘beta of a stock measure’?

Answer 1

(a)

(i) Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns.

(ii) Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts.

High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.

b) The primary risks associated with corporate bonds are credit risk, interest rate risk, and market risk. In addition, some corporate bonds can be called for redemption by the issuer and have their principal repaid prior to the maturity date.

Beta is a measure of a stock's volatility in relation to the overall market. If a stock moves less than the market, the stock's beta is less than 1.0.