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A firm with a low risk tolerance has investments in bonds that it does not want...

  1. A firm with a low risk tolerance has investments in bonds that it does not want to sell at this time. What use could they be put to to generate additional income in the near term?

  1. Lend them to a short seller in exchange for collateral that exceeds the value of the bonds.
  2. Sell them on the open market with the understanding that they be repurchased if interest rates drop.
  3. Take out the same amount of debt with similar duration as the bonds.
  4. Short sell the bonds if their value is likely to decline.
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Answer #1

A firm with a low risk tolerance has investments in bonds that it does not want to sell at this time. What use could they be put to to generate additional income in the near term?

The correct answer is OPTION A i.e Lend them to a short seller in exchange for collateral that exceeds the value of the bonds.

Explanation :

First of all the firm is having a low risk tolerance which means that the firm does not want any risk in their investments so, lending the bonds in exchange of collateral would be the best option the firm could use.

Another thing is that the firm wants to keep the bonds in which it have invested. So, considering other options would be selling the bonds.

Additional income could also be generated be lending such bonds in exchange of collateral as now the firm is free to use such collateral security and also its bonds are safe which is according to its tolerance policy.

Considering other options like selling the bonds in open market or taking out the same amount of debt with similar duration as the bonds or Short sell the bonds if their value is likely to decline is not going to help the firm to generate additional income in any way. As this is against its policies and also the wants its bonds to be safe and unsold.  

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