Evaluate Bond Risk Features
Series 65 · Flashcards
SERIES 65 · FLASHCARDS
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QUESTION
What does a bond rating primarily measure: market price volatility or default risk?
QUESTION
Which rating indicates higher credit quality:
A
A
A
or
B
B
B
BBB
B
B
B
?
QUESTION
State the tax-equivalent yield formula for a municipal bond with yield
y
y
y
and tax rate
t
t
t
.
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ANSWER
TEY
=
y
1
−
t
\text{TEY} = \frac{y}{1 - t}
TEY
=
1
−
t
y
. This formula adjusts the tax-free yield to compare it with taxable alternatives, accounting for the investor's marginal tax rate.
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