1) What are the main differences between corporate bonds and US Treasury bonds?
2) What is the absolute priority rule? Does it always hold in practice and why?
3) Suppose the inflation rate has gone up unexpectedly. To maintain the price stability, the FOMC decided to raise the federal funds rate target. How would the inflation news affect the YTM on Treasury bonds and corporate bonds?
4) The credit spread is the difference in YTM between corporate bonds and Treasury bonds of similar maturities. Explain why the credit spread correlates closely with stock volatility across time, as we have shown in the class.
5) What is a sinking fund provision in a bond issue? A sinking fund provision in a bond issue benefits investors. Do you agree with the statement?
6) Indicate why you agree or disagree with the following statement: Investing in the junk bond market offers the opportunity to realize superior investment returns compared with other debt instruments and common stocks.
7) What is the rollover risk?