Reading 64: Understanding Yield Spreads-LOS h 习题精选 2011, corporate, relative, except, center

1215

Session 15: Fixed Income: Basic Concepts
Reading 64: Understanding Yield Spreads

LOS h: Explain how the liquidity or issue-size of a bond affects its yield spread relative to risk-free securities and relative to other securities.

 

 

Consider three corporate bonds that are identical in all respects except as noted:

• Bond F has $100 million face value outstanding. On average, 200 bonds trade per day.
• Bond G has $300 million face value outstanding. On average, 200 bonds trade per day.
• Bond H has $100 million face value outstanding. On average, 500 bonds trade per day.

Will the yield spreads to Treasuries of Bond G and Bond H be higher or lower than the yield spread to Treasuries of Bond F?

A) Higher for both.

B) Higher for one only.

C) Lower for both.

---

 

Liquidity is attractive to investors, so they will pay a higher price (demand a lower yield) for a more liquid bond than for an identical bond that is less liquid. Bond G is more liquid than Bond F because of its greater size. Bond H is more liquid than Bond F because it trades in greater volume. Therefore both Bond G and Bond H will tend to have lower yield spreads to Treasuries than Bond F.

1215

Relative to a bond sold as part of a large issue, an otherwise equivalent bond that is sold as part of a smaller issue will be sold for a:

A) lower price and have a lower yield to maturity.

B) higher price and have a lower yield to maturity.

C) lower price and have a higher yield to maturity.

---

Bonds that are sold as part of a smaller issue have higher liquidity risk than bonds that are sold in a large issue. Investors will demand a higher yield to maturity to cover the liquidity risk; therefore, these bonds will be sold for less than bonds from larger issues.