Q: Which bond will have largest spread compared to a treasury security?
A) Callable, $20 million oustanding
B) Callable, $80 million outstanding
C) Putable, $20 million outstanding
Answer: A
Ok so obviously choice C can be eliminated right away since it is putable, but why is A the answer instead of B? The explanation says that smaller issues are less liquid… Can somebody tell me what makes a smaller $ value bond issue less liquid?
Thanks.
Compare a small cap stock with MCAP of 20 MUSD to Apple with Billions in MCAP. Since more people are sitting on the position naturally there will occur more buying and selling in the security.
It’s still a sneaky question since a difference of 60 MUSD outstanding will not warrant any large liquidity premium difference.
Overall I’m a bit annoyed with the quality of the Schweser material…
Well… I agree with the answer, although yes, it is pretty vague.
Haha thanks that comparison makes sense even though I guess it’s not a great question to begin with