Credit Risk in Bonds Involves Uncertainty About Whether the Bond

question 29

Multiple Choice

Credit risk in bonds involves uncertainty about whether the bond will default (default risk) ,and uncertainty about the value of the bonds when they default (recovery risk) .In order to profit from a view that recovery risk will worsen,you would

• A)Buy a credit default swap (CDS)and sell a digital default swap (DDS).
• B)Sell a credit default swap (CDS)and buy a digital default swap (DDS).
• C)Buy a credit default swap (CDS)and buy a digital default swap (DDS).
• D)Sell a credit default swap (CDS)and sell a digital default swap (DDS).

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Definitions:

Goodwill

An intangible asset that arises when a company is purchased for more than the fair market value of its net assets, representing reputation, brand, or intellectual property.

Sold Separately

Items or services not included with the primary product and must be purchased independently.

Infringement Suit

A legal case brought against an individual or company for violating a patent, copyright, trademark, or other intellectual property rights.

Legal Expenses

Costs incurred by a business for legal services, such as attorney fees and court costs.