CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

The economy is projected to emerge from a recession soon. The spread between AAA and AA rated bonds can be expected to ______.
A. diminish
B. increase
C. diminish and increase later as the economy rebounds
Explanation: As the economy expands, the risk of default due to improving cash flows would diminish and reduce the spread between higher-rated and lower-rated bonds.

User Contributed Comments 2

User Comment
shiva5555 Does this mean the price or the return? I thought as the economy improves more people buy junk bonds.
poomie83 the riskier the bond the higher the yield required and lower the price.

Although bonds maybe junk their risk of default is low in boom times and this narrows the yield spread between A grade and junk.
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