CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

A debt issuer may be upgraded or downgraded next year, and its credit spread may become smaller or bigger, affecting the value of the bond. "Typically", credit spread migration is likely to ______ the expected value on the bond.

A. reduce
B. not change
C. increase
Correct Answer: A

For 2 reasons: 1. a debt is more likely to be downgraded than to be upgraded (skewed probabilities for change). 2. when it changes, the increase in the credit spread is much larger for downgrades than the decrease for upgrades.

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