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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

Which of the following is the most typical early market-based symptom that a firm with publicly traded debt is moving toward distress?

Widening credit spreads and falling bond prices relative to comparable firms, often with downgrade pressure, are typical early market symptoms of distress. Investors reprice default risk before a missed payment occurs. Tighter CDS spreads or a higher rating would signal improving, not deteriorating, credit quality.

  1. AWidening credit spreads on its bonds and falling prices relative to peers, together with downgrade pressureCorrect
  2. BA rise in its investment-grade rating
  3. CNarrowing of its CDS spread relative to its sector
  4. DA rise in the proportion of its debt held as secured senior loans with covenants loosened

Explanation

Markets typically price rising default risk before formal events occur, so bond prices fall and spreads and CDS levels widen relative to peers, often alongside negative rating actions. The other options point toward improving credit quality or are not clear distress signals.

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