Purchase Solution

Investor's risk aversion

Not what you're looking for?

Ask Custom Question

Please help me understand these finance questions:

1) How is an investor's risk aversion reflected in a bond's maturity risk premium?

2) Would an increase in the volatility of long-term interest rates cause a bond investor to pay more or less for a non-callable bond that had high convexity?

3) If you purchase a callable bond for $X. How you are simultaneously selling a call option.

4) How is a long-term bond's price impacted in opposite directions when the required rate of return on the bond rises?

Purchase this Solution

Solution Summary

The solution discusses the investor's risk aversion reflected in a bond's maturity risk premium.

Solution Preview

1) How is an investor's risk aversion reflected in a bond's maturity risk premium?

As per investopedia, " Maturity risk refers to the risk that is associated with uncertainty of interest rate. According to Financeglossary.net, the amount of the premium depends on the maturity of the bond. The longer it takes, the higher the amount of premium."1
Hence investor risk aversion is reflected with increase in a bond's maturity risk premium with increase in maturity period. Bonds having greater duration have higher maturity risk and thus their maturity risk premium is also greater.

2) Would an increase in the volatility of long-term interest rates cause a bond investor to pay more or less for a non-callable bond that had high convexity?

Convexity "is a measure of the curvature in the relationship between bond prices and bond yields that ...

Purchase this Solution


Free BrainMass Quizzes
Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media