Explanation:
Even investment-grade bonds are exposed to the risk of the issuer being taken over or merging with another company. Event risk can increase at a market level if there is a trend toward increasing mergers in the economy.
(Book 3, Module 43.2, LO 43.e)
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Question 87
Two bond analysts are discussing the level of event risk in their bond portfolio. Analyst A says that since their portfolio consists of investment-grade bonds, event risk should not be a concern. Analyst B says that since they have a small number of different issues in their portfolio, and event risk is idiosyncratic, the event risk in their portfolio is negligible. Which, if either, of these statements is based on correct assumptions?
A
Neither statement by the analysts is correct.
B
The statement made by Analyst A is correct, but not the one made by Analyst B.
C
The statement made by Analyst B is correct, but not the one made by Analyst A.
D
Both statements made by the analysts are correct.
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