BOND QUESTION

Ive got a bond question!
If you have 2 bonds:

1) a corporate bond with 5 years to matuiry
2) a Government bond with 10 years to maturity

They are identical in all other ways. Which do you pick and why??

i was thinking of answering something like this:
the bond with the lower maturity has less interest rate risk but more default risk, so it would depend on the investor and their risk preferences.

does anone have any other ideas??

 

Yes that is correct. You could also talk about duration (don't bring it up unless you know it like the back of your hand) and how the government bond has a longer duration so if interest rates rise it will get a bigger price jump.

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
 
Best Response
Mon22:
Ive got a bond question! If you have 2 bonds:

1) a corporate bond with 5 years to matuiry 2) a Government bond with 10 years to maturity

They are identical in all other ways. Which do you pick and why??

i was thinking of answering something like this: the bond with the lower maturity has less interest rate risk but more default risk, so it would depend on the investor and their risk preferences.

does anone have any other ideas??

I'm assuming this is an interview question. It's clearly asking two things: 1) what's the difference between a corporate and government bond? 2) what effect does the time to maturity have on value

corporate bond has default risk so it must have a higher coupon than the government bond, which is default free (unless we are in 1998 Russia) a longer time to maturity means you have more interest rate risk, so if rates go up you will be stuck with relatively low rates for 10 years instead of 5, or you will have to sell the bond at a discount if you want to invest that money elsewhere. another thing to mention is that effect of inflation is higher with the 10 year bond as well.

 

Sit modi reprehenderit ipsum exercitationem quis voluptas aperiam aut. Quidem et ex cupiditate autem ut enim. Dolorem quos odit et molestias aut magni sit.

Officiis unde consequatur officiis ad. Facere officiis nemo totam rerum ullam qui unde.

Beatae sed aliquid eveniet incidunt recusandae dolore. Nisi accusantium modi quam debitis.

http://convertyourbond.com Free market commentary and trading insights to help with interviews

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
DrApeman's picture
DrApeman
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
kanon's picture
kanon
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”