I have a question regarding question 15 and question 25 in Chapter 29. As I read the answers, they seem to contradict each other, though I imagine I am missing something. The manager in question 15 believes that in Q1 there will be a surge of single A rated issues that will come to market resulting in a widening of spreads, whereas in question 25, Warren is correct in saying that the increase in the in the supply of new issues will cause spreads to tighten. The reading confirms Warren’s thoughts, but I am confused as to the reasoning in question 15. Is it because the increase in supply followed a period where there was a lack of single A offerings? Any insight? Thanks
Los 29b and c indicate spreads would narrow in times of liquidity. Ie prices should go up. However, in practice they usually narrow - readings say this is down to pricing validation (ie new issues confirm secondary spreads which increases confidence in the bond and thus demand). In reality, although not in the text (so don’t put this on the exam) it’s actually because people issue more in better credit markets - correlation is not causation! On the exam - I would put an increase in supply
Been answered before: http://www.analystforum.com/phorums/read.php?13,1251230,1251258 http://www.analystforum.com/phorums/read.php?13,1225242,1225272
Thanks everyone…will be sure to use search function next time 