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Answer: The size of a bond issuance is not empirically related to its recovery rates.
## Explanation **B is correct.** Recovery rates are not empirically related to bond issuance size. Research has shown that the size of a bond issuance does not have a systematic relationship with recovery rates in default situations. **A is incorrect.** The empirical distribution of recovery rates is bimodal, not binomial. Recovery rates tend to cluster around very low values (near 0%) and relatively high values (40-60%), creating a bimodal distribution pattern rather than following a binomial distribution. **C is incorrect.** It is possible for a corporate bond portfolio that experiences defaults to outperform US Treasury securities over the same time period. The higher coupon payments from corporate bonds can offset default losses, especially in periods of stable or improving credit conditions. **D is incorrect.** Spread duration measures the approximate percentage change in a bond's price for a 100 basis point change in the credit spread, assuming the Treasury rate (risk-free rate) remains unchanged. It does not measure the change in corporate bond yield for a change in Treasury rates.
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A junior credit risk analyst at a US firm is preparing a research report on the attributes and performance of corporate bonds. The analyst assesses corporate bond default rates, credit spread risk, recovery rates, and their impact on portfolio returns for a typical class of investment grade bonds. Which of the following statements would the analyst be correct to include in the 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.