Credit strategies answered

CFA Level III Fixed Income
#1

The answer to Question 4 of reading 24 is C, while I would think B is more reasonable.

anyone can shed light on it please?

#2

B - says that default rates will be low, but the statement says that spreads are higher than normal.

C - says that the firm has an economic outlook that is more positive than the consensus.

So, B implies that defaults will be low if the invest in HY bonds right away, which is incorrect given the higher than usual spreads. But, C implies that going forward since they will see higher than normal economic growth, HY spreads would narrow and prices would rise.

#3

Are u saying that the credit spread should have been lower than current level, which implies their forecast of improved economy going forward?

#4

Kind of, more like the spread will be lower going forward, hence the expected rise in prices.

#5

I wanna say that if economy is improving, default rates for high-yield is relatively lower than current conditions too… what’s wrong with it?

#6

You’re correct, default rates will decline with an improved economy. The second part of the answer is the problem.

#7

Thanks for your kind patience.

i would say that answer C is better right than answer B.

Thank You very much!