CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Credit spread risk can be described as the risk that the price of a bond will ______.
A. decline due to an increase in the credit spread
B. decline due to a decrease in the credit spread
C. rise due to a decrease in the credit spread

User Contributed Comments 5

User Comment
mtcfa C: Because if you benefit from a narrowing of the credit spread, that is not really a risk... more of a positive side effect.
wollogo The debt obligation is fixed. The value of the traded security will change but the issuer still has the same contracted cash flow obligations (coupon and principal). However, the probability that the issuer will default increases.
andy4cfa As the credit spread increases, the investors will demands more to compensate the risk and thus cause a drop of bond price, which implies a decrease of issuer's obligation.
octavianus mtcfa:

Narrowing of credit spreads are the upside.

Widening of credit spreads are the downside, where the risk lies in investing. Investors require returns based on risk (downside), not upside (no return required because it isn't a risk.

A. decline due to an increase in the credit spread = the only logical answer.
kellyyang inversely relationship btwn credit spread risk & bond price!
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