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Answer: The size of a bond issuance is not empirically related to its recovery rates.
B is correct. Recovery rates are not related to bond issuance size. A is incorrect because the empirical distribution of recovery rates is bimodal, and not binomial, normal, or lognormal. C is incorrect as it is possible for a corporate bond that experiences defaults to outperform U.S. Treasury securities. D is incorrect because spread duration, which measures a corporate's credit-spread risk, is the approximate percentage change in a bond's price for a 100 bp change in the credit-spread, assuming that the Treasury rate is unchanged.
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A junior credit risk analyst working for a U.S. financial institution is tasked with creating a research report to analyze various attributes and performance measures of corporate bonds. The report specifically examines default rates of corporate bonds, risks tied to credit spreads, recovery rates, and how these factors collectively impact the returns of a portfolio made up of standard investment-grade bonds. What is the correct statement that the analyst should include in their report?
A
The distribution of recovery rates of corporate issues is best described as a binomial distribution.
B
The size of a bond issuance is not empirically related to its recovery rates.
C
Measured over the same time period, US Treasury securities always outperform a portfolio of corporate bonds that experiences defaults.
D
Spread duration is best measured by the change in the corporate bond yield for a given 100 bp change in the Treasury rate.
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