8010 Exam Dumps | A bank holds a portfolio ofcorporate bonds. Corporate bond spreads widen, resulting in a loss of value

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PRMIA.8010.v2022-06-27.q87
Question 78

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Question 78/87

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

A. Liquidity risk

B. Credit risk

C. Market risk

D. Counterparty risk

Correct Answer: C

Explanation
The difference between the yields oncorporate 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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