Qns: which bond is most likely to recommend as the short position ?
Spread to Treasuries (bps)
Ans is Bond 2.Reason:Bond 1 is in a non-cyclical industry, unlike Bond 2, which is in a cyclical industry. Bond 1 has a slightly higher debt-to-capital ratio than Bond 2 but not material. Bond 2 has a relatively tight spread compared with Bond 1. These factors suggest that Bond 2 is a better candidate for a short position. Dun understand the reason for the tight spread part. My answer is Bond 1 due to its lowest credit rating (thus largest spread to Treasuries), highest Debt/capital ratio and lowest Enterprise Value/EBITDA. Can anyone highlight if my understanding is incorrect & why Bond 2 with tighter spread is more suitable for shorting in this case? Pls enlighten. Thanks.