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Answer: Flight to quality
A wider credit spread means investors demand more compensation relative to risk-free rates. **Flight to quality** increases demand for safer assets such as government bonds and tends to **widen corporate bond spreads**. - **A** is incorrect because economic expansion usually improves credit conditions and narrows spreads. - **B** is incorrect because better liquidity generally narrows spreads. - **D** is incorrect because an embedded **put** option benefits the bondholder and usually reduces required spread, unlike a call option which would generally increase spread.
Author: Manit Arora
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Q-198.1. Which of the following is most likely to cause an increase (i.e., widening) in a corporate bond credit spread?
A
Economic expansion in the business cycle
B
Increase in the bond’s liquidity
C
Flight to quality
D
Addition of embedded put option feature to the bond
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