Question
Bonds are differently categories based on yield they generate. For example: high yield, investment grade, and...
Bonds are differently categories based on yield they generate. For example: high yield, investment grade, and junk grade. Now, what can be said about the correlations between different bond types?
| None of these are correct. | ||
| low correlations between various investment grade bond indexes. | ||
| high correlations between investment grade bonds and high yield bonds. | ||
| no correlations between investment grade bonds and high yield bonds. | ||
| low correlations between investment grade bonds and high yield bonds. |
Answers
low correlations between investment grade bonds and high yield bonds.
High yield bonds are strongly related to the business results of companies. At the same time, credit spread which is the incremental yield offered by such bonds is inversely correlated to the interest rates. This makes the higher yield bonds largely insensitive to the interest rates which are the dominant risk factor for most investment grade bonds.
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