Share
Explore BrainMass

Investor's risk aversion

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?

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 ...

Solution Summary

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

$2.19