Which statement(s) is/are true?

I. HY bonds are more sensitive to changing macroeconomic and credit conditions.
II. The yield spread difference between IG bond ratings is generally narrower than the difference between IG and HY.
III. As the business cycle improves, credit spreads narrow and investors are willing to assume more credit risk.

Correct Answer: All are true.

Weakening economic conditions will make the investors demand a greater risk premium and hence a wider credit spread. On the opposite side, good economic conditions will tighten the credit spread because investors expect an improvement of credit measures which lowers default risk.