2008 Essay Q5 A

Determine the expected effect on the portfoilo’s value over the next two weeks for each potential trade, given the strategist’s market expectations ( Interest rate spread widen) buy 7 yrs BB industrial coporate bonds, and sell BBB industrial bond? I would say positive. Because expected interest rate widen will cause price goes down more for BBB compare to BB. it is better to sell BBB now before its price drop, and buy BB which has relatively higher future value. Answer is opposite with same reason but different conclusion

i think if rates widen, price of lower rated bonds (BB) will decline more than BBB rated bond. hence we should buy BBB (it’ll face less of a price decline) and sell BB bond (before its price declines sharply).

if the economy goes down the $hitter like it did when Lehman collapsed, junk bonds get slaughtered given higher default risk. you’d definitely rather be holding BBB debt if the economy is headed downward.