Spread changes confused

CFA Level III
#1

A junior analyst considers a 10-year high-yield bond issued by EKN Corporation (EKN) position in a high-yield portfolio. The bond has a price of 91.82, a modified duration of 8.47, and a spread duration of 8.47. The analyst speculates on the effects of an interest rate increase of 20 bps and, because of a change in its credit risk, an increase in the EKN bond’s credit spread of 20 bps. The analyst comments that because the modified duration and the credit spread duration of the EKN bond are equal, the bond’s price will not change (all else being equal) in response to the interest rate and credit spread changes.

Which of the following outcomes is most likely if the junior analyst revises the bond’s original recovery rate higher?

  1. An increase in the bond’s POD
  2. A decrease in the bond’s POD
  3. A decrease in the bond’s credit spread

I think there are 2 answers for this. The correct answer is 3 but couldn’t it also be 1? pd= spread/(1-rr) so pd is higher? Why should we not approach it from this angle?

#2

PD is subjective measure, we don’t use that formula in practice to backsolve pd. It is mostly derived from statistical or hist. data.

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