CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
An analyst says that when a corporate bond's credit spread widens because the market perceives higher default risk, but the issuer has not defaulted, the bond investor has most likely experienced:
The investor has most likely experienced spread risk. A wider credit spread raises the required yield and lowers the bond's market price even though no default has occurred, so the investor suffers a mark-to-market loss.
- Aspread risk, causing a fall in the bond's market priceCorrect
- Bdowngrade risk only, with no effect on the bond's price
- Csettlement risk, causing a delay in coupon payments
Explanation
Spread risk is the risk of a wider credit spread, which lowers the bond's price even without default. Downgrade risk does affect price, and settlement risk concerns delivery, not spread.
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