Skip to content

FRM Part I · FRM Exam Part I · Corporate Bonds

During a market stress episode, which change in corporate bond market conditions is most typical?

In stress, bid-ask spreads typically widen and dealers become less willing to hold inventory. Balance-sheet and risk limits constrain market making, so liquidity premiums rise and trading becomes more costly, especially in lower-rated and less frequently traded bonds.

  1. ABid-ask spreads narrow as dealers expand inventories
  2. BBid-ask spreads widen and dealers reduce willingness to hold inventoryCorrect
  3. CTrading volumes rise uniformly across all rating categories at tighter spreads
  4. DLiquidity premiums fall as investors seek illiquid assets

Explanation

In stress, dealers face balance-sheet and risk constraints and reduce inventory, so spreads widen and liquidity premiums rise. The other options describe improving liquidity, which is the opposite of typical stress behavior.

Did you get it right without looking?

One question tells you little. A timed set on Corporate Bonds shows your real accuracy, how long you take and where you lose marks.

Practise Corporate BondsFree diagnostic mock

More Corporate Bonds questions