Question

If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from :___________
a. declining interest rates.
b. rising interest rates.
c. inflation.
d. changes in hedging activities.

Answer 1

Answer:

b. rising interest rates.

Explanation:

A bond can be defined as a debt or fixed investment security, in which a bondholder (creditor or investor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time.

Generally, the bond issuer is expected to return the principal at maturity with an agreed upon interest to the bondholder, which is payable at fixed intervals.

The par value of a bond is its face value and it comprises of its total dollar amount as well as its maturity value. Also, the par value of a bond gives the basis on which periodic interest is paid. Thus, a bond is issued at par value when the market rate of interest is the same as the contract rate of interest. This simply means that, a bond would be issued at par (face) value when the bond's stated rated is significantly equal to the effective or market interest rate on the specific date it was issued.

In Economics, bonds could either be issued at discount or premium.

Generally, if a business firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from rising interest rates.