Hi, I am looking at EOC questions from CFAI volume 4 reading 30 and it appears that there are some conflicting answers. In question #9, answer key says that new issues in the primary market provide better valuations and tend to narrow spreads. In question #15, answer key says that an increase in single A bond supply will widen spreads. All this seems conflicting to me… Could someone please explain and maybe state what rule we should follow on exam day? thanks a lot John
i find the eoc explanation contradictory too. i am going with narrow spread for new supply - leading to better price performance .that was the answer in a sample exam as well.
one more on question 25… answer key: “Based on recent research, when primary market supply increases, credit spread do not tighten”
there was another thread on this. search I think the general opinion was that generally spreads narrow despite some contradictory evidence
john722 Wrote: ------------------------------------------------------- > Hi, > > I am looking at EOC questions from CFAI volume 4 > reading 30 and it appears that there are some > conflicting answers. > In question #9, answer key says that new issues in > the primary market provide better valuations and > tend to narrow spreads. Issuance of high grade bonds indicates the confidence of the company in the issues and that it is going to use the funds raised for expansion, so spreads narrow and provide better valuations. > In question #15, answer key says that an increase > in single A bond supply will widen spreads. > All this seems conflicting to me… > I don’t know about A rated bonds but issuance of speculative bonds might indicate that the company is raising capital to pay off the debt going to mature, so spreads widen due to increasing risk. > Could someone please explain and maybe state what > rule we should follow on exam day? > > thanks a lot > > John Hope this helps.
gauravku Wrote: ------------------------------------------------------- > I don’t know about A rated bonds but issuance of > speculative bonds might indicate that the company > is raising capital to pay off the debt going to > mature, so spreads widen due to increasing risk. True or not that’s a good way to remember it thanks.