CFA Level I · CFA Level I Exam · Credit Risk
Other things equal, a widening of credit spreads on a corporate bond is most likely to result from:
A decrease in the bond's liquidity most likely widens its spread, because investors demand a larger liquidity premium on top of the credit premium. An upgrade or stronger risk appetite lowers required compensation and narrows spreads.
- Aan upgrade in the issuer's credit rating
- Ba decrease in the bond's liquidityCorrect
- Ca rise in investor appetite for risk
Explanation
Lower liquidity raises the liquidity premium, so the spread widens. A rating upgrade and stronger risk appetite both reduce the compensation investors require, which narrows spreads.
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