Extract of question:
At a second meeting, Ruelas tells Maestre about a EUR22 million bond issue Cávado would like to retire. The issue is currently rated A–, and credit spreads for that rating are relatively high. Ruelas expects spreads to narrow in the future as the economy improves and as Cávado’s performance for the coming year is factored into markets. The bond is closely held by two investment funds, and Ruelas feels they would be willing to sell their bond exposure at a small premium over the market price. Ruelas also feels Cávado’s auditors would permit accounting defeasement if Cávado purchased a portfolio of high-quality government bonds whose cash flow characteristics closely matched the Cávado bonds or if it purchased a portfolio of corporate bonds with similar duration and convexity characteristics and higher yields. Maestre recommends a strategy for retiring the bond.
Q. Which of the following strategies would Maestre most likely recommend for retiring the Cávado bond?
A. Bond tender offer
B. Cash flow matching with government bonds
C. Duration matching with corporate bonds
This requires judgment and I’m not sure I agree with the answer. The question throws people off.
The vignette states “Ruelas expects spreads to narrow in the future as the economy improves and as Cávado’s performance for the coming year is factored into markets” - shouldn’t that rule out a tender offer since the price of the bond will likely be cheaper going forward?