Question

When credit/ risk spread is observed to be high, it indicates - expansion and high-interest rate...

When credit/ risk spread is observed to be high, it indicates

- expansion and high-interest rate risk

-recession as and high default rate risk

Homework Answers

Answer #1

Option B.

  • When the credit / risk spread is observed to be high, it indicates recession and a high default rate risk.
  • Credit spread is also termed as an yield spread as it shows a difference in yield or the rate of return between any two bond's or any two Investments having similar maturity levels.
  • The yield curve represents the relationship between the yield to maturity and the credit risk and the economy is expected to fall into a recession if the difference in yield to maturity between two bonds or investments leads to high default risk due to greater financial stress.
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