Supply of new Bond Issues Q

When supply increases, what happens to credit spreads. I think the spread tightens… However, EOR 30; Q 25 says spread doesnt tighten with increased supply. Can anybody explain this?

it’s in the errata. you are correct. the spread tightens.

This always seems counterintuitive to me, but I’ve learned to accept it. Usually with an increase in supply of anything, the price would fall and yields would widen. But since the increased supply helps reinforce the pricing of these bonds, the risk premium on the bonds falls and lowers the overall spread… does that sound right?

I think so. The increased supply strengthens the price of the bonds. Since the price goes up, the spread comes down…

ilvino Wrote: ------------------------------------------------------- > This always seems counterintuitive to me, but I’ve > learned to accept it. Usually with an increase in > supply of anything, the price would fall and > yields would widen. But since the increased > supply helps reinforce the pricing of these bonds, > the risk premium on the bonds falls and lowers the > overall spread… does that sound right? yup. you’ve got it. it’s counterintuitive then they have that errata… not helpful.

thanks for pointing out the errata… seeing schweser’s initial answer would have wrecked my fragile comprehension.

it was worse, ilvino. it was the CFAI with the error in one of their vignettes! Yikes.

wow - just working through the EOCs now. Thanks for the head’s up.