Reading 65: Understanding Yield Spreads - LOS h ～ Q1 corporate, except, style, three, black

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1.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?

Bond G

Bond H

 

A)                                        Higher    Higher

B)                                        Higher    Lower

C)                                        Lower    Lower

D)                                        Lower    Higher

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答案和详解如下：

1.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?

Bond G

Bond H

 

A)                                        Higher    Higher

B)                                        Higher    Lower

C)                                        Lower    Lower

D)                                        Lower    Higher

The correct answer was C)

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.