spread

CFA Level I
#1

YTM: T-bond 5 % Yahoo-Bond 7 % Same maturity, no embedded derivatives, inflation remains constant with 3 % p.a., identic bonds Whats the explanation for the spread: a liquidity b maturity c default risk d business risk

#2

what do you mean? Spread contains, default risk + liquidity risk only here. altho yahoo bond slightly less liquid than tbills that all.

#3

it’s not my question, pepp

#4

2%?? what is the answer. i dont get this question.

#5

Choose a,b,c,d.

#6

Liquity: easier to sell a gov’t bonds, more demand Maturity: not party of spread Default: risk of Yahoo going under, govt will not Business risk: credit risk of Yahoo not performing at current spread

#7

C

#8

default d

#9

Well then it’s default, but I still stand by my explanation of the other ones.

#10

sorry default c wow im off today

#11

I think so as well, but can anybody else confirm?

#12

its def C, for most corp and gov bonds that are similar in all aspects the corp will have a higher spread due to default risk (Lower rating than a gov note/bond)

#13

thought C as well, but credit risk would be a better word than default risk

#14

think of it in terms of bond ratings, which are estimations of the probability of default. If a company has a lower rating (higher prob of deafult) then the investor required additional compensation in terms of a higher yield

#15

I would have choosen C in exam, but whats wrong with D ??

#16

it can’t be D, cuz there is no such thing as business risk in spread. it should be Credit risk.

#17

It could be, but in terms of how the question was asked C would be the “best answer”, which CFA seems to test alot