Credit Risk in Bonds Involves Uncertainty About Whether the Bond

question 6

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 default risk will worsen, while not taking a view on recovery risk, you would most prefer to

• 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) Sell a credit default swap (CDS).
• D) Buy a digital default swap (DDS).

Identify conditions under which contracts can be deemed void or voidable.

Comprehend the implications of a person's mental state on contract validity.

Recognize the rights and obligations of minors in contract law.

Distinguish between necessary and non-necessary items in contracts involving minors.

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Definitions:

Federal Reserve Bank

One of the 12 regional banks that, together with the Board of Governors, make up the Federal Reserve System, which serves as the central banking system of the United States.

Treasury Notes

Short- to medium-term debt obligations issued by a national government with fixed interest rates and maturities ranging from one to ten years.

Federal Reserve System

The central banking system of the United States, responsible for monetary policy, regulation of member banks, and ensuring stability of the financial system.

District Banks

Banks that are part of a larger Federal Reserve System in the United States, responsible for overseeing the monetary policy and banking regulations in their specific district.