Book-4, Pg-90, Q15

Though all of the EOC questions from reading 24 are garbage and a waste ot time, I would like to understand this particular issue being addressed in Q15

Issuance of new bonds - Will it winden or narrow the credit spreads?

I though the primary market validates the offering and pricing and hence the spread will narrow and cause price appreciation?

Is my understanding correct?


once liquidity dries up issuers will nee to increase spread to attract investors

think in terms of supply demand…manager expects there will be lot of A-rated bond issuances so supply will be more, resulting in widening of spreads. Opposite happend when issuance goes down.

See that’s where the confusion is! You 2 are in disagreement…

I have an understand similar to igor’s - New supply would reduce spread, as the new supply from primary market is validating the secondary market.

But, what you explained wIL3 is what the book shows.

Don’t know which one is correct.

imo, the difference is context, what you are saying is correct if we look on standalone basis, but here we need to look on a comparitive basis (between 2 types of securties)

“Supply will hurt spreads” relates to particular issure not to the market. So many issuance will take place with spread contractions.

vol 4 p.71

The answer for q15 is about a manager’s belief, so we can’t comment on it.