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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers

A quasi-government agency issues bonds that carry an explicit guarantee from its national government. Relative to an otherwise identical bond without the guarantee, the guaranteed bond will most likely trade at:

The guaranteed bond will most likely trade at a narrower spread to the sovereign yield. The explicit guarantee transfers default risk toward the national government, so investors demand less credit compensation than for an otherwise identical bond without the guarantee.

  1. Aa wider spread to the sovereign yield
  2. Ba narrower spread to the sovereign yieldCorrect
  3. Cthe same spread because agencies are all government owned

Explanation

An explicit government guarantee shifts credit risk toward the sovereign, so investors require less credit spread. The spread to the sovereign yield is therefore narrower than for the unguaranteed bond.

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