Discuss PRMIA 8010 Exam Topic 9 Question 88

A bank holds a portfolio of corporate bonds. Corporate bond spreads widen, resulting in a loss of value for the portfolio. This loss arises due to:

ALiquidity risk

BCredit risk

CMarket risk

DCounterparty risk

Suggested Answer: C

The difference between the yields on corporate bonds and the risk free rate is called the corporate bond spread. Widening of the spread means that corporate bonds yield more, and their yield curve shifts upwards, driving down bond prices. The increase in the spread is a consequence of the market risk from holding these interest rate instruments, which is a part of market risk. If the reduction in the value of the portfolio were to be caused by a change in the credit rating of the bonds held, it would have been a loss arising due to credit risk. Counterparty risk and liquidity risk are not relevant for this question. Therefore Choice 'c' is the correct answer.

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12 comments · newest first

Viki 2 months ago

True, but market conditions affect spreads more directly. C) Market risk seems right to me.

Refugia 2 months ago

I agree, but isn't it also related to A) Liquidity risk? Harder to sell bonds can cause losses.

Anthony 3 months ago

I think it's C) Market risk. Wider spreads usually indicate market volatility.

Jules 3 months ago

I thought counterparty risk could play a role too, interesting!

Carlton 3 months ago

Wait, are we sure it’s not liquidity risk? Seems a bit off.

Sheridan 3 months ago

Agreed, market risk is the main culprit here.

Elouise 3 months ago

I think it’s more about credit risk, companies might be struggling.

Mariann 3 months ago

Definitely market risk, spreads widening is a classic sign.

Jerry 4 months ago

I feel like this is definitely about market risk, but I wonder if there’s an element of credit risk involved too.

Darrin 4 months ago

I practiced a similar question where widening spreads indicated market risk, but I’m confused if liquidity risk could also play a role.

Doug 4 months ago

I'm not entirely sure, but I remember something about credit risk being tied to the issuer's ability to pay. Could that be relevant here?

Silva 4 months ago

I think this might relate to market risk since the value of the bonds is affected by changes in spreads.

PRMIA 8010 Exam - Topic 9 Question 88 Discussion