CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

If the market expects that the financial health of a bond issuer is going to deteriorate, the first warning signal is ______.

A. downgraded credit rating
B. widened credit spread
C. higher coupon rate required by bond investors
Correct Answer: B

A widening of the credit spread of the bond will happen first, followed by the downgrade of the bond. The two usually happen long before the issuer actually defaults.

User Contributed Comments 6

User Comment
danlan2 Why B happens before A?
PhiWong I believe it is the expectation drove the credit spread to be widen. Any existing bond price will be depressed and yield will be widen compared to the same maturity of treasury.
bmeisner Usually a downgrade happens after the market has already priced in the additional risk. Ratings guys are always behind the curve.
noonah Downgrade is made after a thorough study, while credit spread is actively traded, and hence the reaction of the latter to any news is much quicker.
ciji EMH all the way.
khalifa92 very nice question, market expectations are deadly.
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