CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
During an economic downturn, an analyst expects credit spreads on corporate bonds to widen. Compared with high-quality issuers, spreads on lower-rated issuers are most likely to widen by:
Spreads on lower-rated issuers will most likely widen by a larger amount. In a downturn, default probabilities rise most for weaker credits and investors seek safer assets, so they demand greater compensation for lower-rated bonds than for high-quality issuers.
- Athe same amount, since benchmark yields drive spread changes
- Ba smaller amount, since investors prefer lower-rated bonds in recessions
- Ca larger amount, since investors demand more compensation for higher default riskCorrect
Explanation
Spreads reflect default and loss risk, which rise more for weaker credits in downturns. Lower-rated bonds therefore see larger spread widening, a pattern known as a flight to quality.
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