Spread − EL

问题如下：

A bond investor is considering the credit risk components and observed yield spreads for two IG bonds of similar maturity and liquidity:

Which of the following conclusions about the relationship between these bonds is most correct?

选项：

A.

An investor should be indifferent between purchasing Bond 1 and Bond 2, since Bond 1’s higher spread is sufficient compensation for the higher POD versus Bond 2.

B.

An investor should prefer Bond 2 over Bond 1, since they may earn a spread that is more than sufficient for assuming the credit risk.

C.

An investor should prefer Bond 1 over Bond 2, since it offers the highest spread relative to the expected loss.

解释：

C is correct. We can compare Bond 1 and Bond 2 by calculating the expected loss for each and comparing it to the annual spread:

EL = POD × LGD；Credit Spread ≈ POD × LGD

Bond 1: EL = 0.938% (= 1.25% × 75%)；Spread − EL = 6.2 bps (= 1.00% − 0.938%).

Bond 2: EL = 0.935% (= 1.1% × 85%)；Spread − EL = 1.5 bps (=0.95% − 0.935%).

An investor should therefore choose Bond 1 given its higher expected return versus credit risk. A is incorrect as it fails to take the LGD into account. B is incorrect as although Bond 1 earns a 1.5 bps spread above the expected annual loss, it is less than the additional 6.2 bps spread above the expected loss earned by purchasing Bond 1.