Multiple Choice
In the context of investments in securities, when capital is allocated to purchase real capital (such as long-term plant and equipment), this process is best described as:
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
In the context of corporate bonds, what does 'spread tightening' indicate?
A
A decline in the credit quality of corporate bond issuers
B
A rise in the overall interest rates in the market
C
A decrease in the yield difference between corporate bonds and comparable government bonds
D
An increase in the risk premium required by investors for holding corporate bonds
Verified step by step guidance1
Understand the concept of 'spread' in the context of bonds: The spread refers to the difference in yield between corporate bonds and government bonds of similar maturity. It reflects the additional risk premium investors demand for holding corporate bonds over safer government bonds.
Recognize what 'spread tightening' means: Spread tightening occurs when the yield difference (spread) between corporate bonds and government bonds decreases. This typically indicates improved credit quality or reduced risk perception for corporate bonds.
Analyze the options provided: Evaluate each option to determine which aligns with the definition of spread tightening. For example, a decline in credit quality would likely lead to spread widening, not tightening.
Focus on the correct answer: A decrease in the yield difference between corporate bonds and comparable government bonds is the definition of spread tightening. This suggests that investors perceive corporate bonds as less risky relative to government bonds.
Relate spread tightening to market conditions: Spread tightening can occur due to factors such as improved economic conditions, better corporate performance, or reduced market volatility, all of which lower the risk premium demanded by investors.
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