How come Bond G has lower spread compared with Bond F in the following. If they have same volume, I thought it does not depend of value ($300 mill) of bond -------------------------------------------------- Consider three corporate bonds that are identical in all respects except as noted: * Bond F has $100 million face value outstanding. On average, 200 bonds trade per day. * Bond G has $300 million face value outstanding. On average, 200 bonds trade per day. * Bond H has $100 million face value outstanding. On average, 500 bonds trade per day. Will the yield spreads to Treasuries of Bond G and Bond H be higher or lower than the yield spread to Treasuries of Bond F? Bond G Bond H A) Higher Higher B) Higher Lower C) Lower Higher D) Lower Lower Your answer: B was incorrect. The correct answer was D) Lower Lower Liquidity is attractive to investors, so they will pay a higher price (demand a lower yield) for a more liquid bond than for an identical bond that is less liquid. Bond G is more liquid than Bond F because of its greater size. Bond H is more liquid than Bond F because it trades in greater volume. Therefore both Bond G and Bond H will tend to have lower yield spreads to Treasuries than Bond F.
chinni234 Wrote: ------------------------------------------------------- > How come Bond G has lower spread compared with > Bond F in the following. Reread the answer. Bond F is less liquid than bond G (bond G is larger in size but still trades the same in terms of # of trades per day). The more liquid the asset, the lower the yield required by investors. Therefore, G will get a lower spread from RFR, since it’s more liquid.